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Annual report of the North Carolina Office of the State Auditor : accountability, integrity & reliability

Annual report of the North Carolina Office of the State Auditor : accountability, integrity & reliability

For the Fiscal Year Ended June 30, 2003
Ralph Campbell, Jr. North Carolina State Auditor
Accountability, Integrity & Reliability
ANNUAL REPORT OF THE
NORTH CAROLINA
OFFICE OF THE STATE AUDITOR
Cover photo: Courtesy of Michael Zirkle Photography
G
message from the state auditor
1
overnment agencies and institutions annually spend billions of
dollars of public money to provide services for North Carolina’s citizens.
To ensure that these funds are wisely spent and accounted for, the Office
of the State Auditor provides audit and advisory services to State- sup-ported
organizations. This annual report provides an overview of the
Office of the State Auditor and summarizes its activities for the year
ended June   ,     . I hope you find the report informative and useful.
I have proudly served the State of North Carolina as state auditor
since January     . My staff and I take our responsibility to the citizens
of North Carolina very seriously and strive to professionally perform
our duties. We continually seek ways to improve the quality of our
work while successfully adapting to the ever- changing business envi-ronment.
We pledge to serve you to the very best of our ability.
Ralph Campbell, Jr.
North Carolina State Auditor
The 1868 State
Constitution
created the Office
of the State
Auditor.
In 1782, the
General Assembly
appointed Richard
Caswell as North
Carolina’s first
Comptroller.
T HISTORY
he term auditor in North Carolina State government
dates back to the original colonial constitution, adopted
on March  ,     , which authorized twelve auditor posi-tions.
However, no evidence exists that the positions ever
functioned in their intended capacity of keeping rent rolls
and other accounts. As the colony grew, the General
Assembly and comptrollers of the King of England
appointed boards of auditors to serve in various com-munities
to handle matters as des-ignated
by the English monarchy.
In     , the General Assembly
appointed Richard Caswell as North
Carolina’s first comptroller. His
duties were to direct the mode of
stating, checking, and controlling all
public accounts as well as to keep
these accounts for inspection by the
General Assembly. In addition, ten
boards of auditors were to be
located in various parts of the state.
This system remained in place
until     when the General
Assembly established the Office of
Auditor of Public Accounts. That
office was abolished in     .
The     State Constitution cre-ated
the Office of the State Auditor
( Table  ). The state constitution states that the people
should elect the state auditor to “ superintend the fiscal
affairs of the state, examine and settle accounts of per-sons
indebted to the state, liquidate claims by persons
against the state, and draw warrants on the state treasurer
for moneys to be paid out of the treasury.”
In     , the system of county taxes on property, polls,
and income was established, with the local sheriff act-ing
as the tax collector. The state auditor prepared the
forms for listing taxes and gave them to each sheriff. The
Auditor was to report to the state treasurer the amounts
due to each fund and whether any sheriff defaulted his
account. The Revenue Act of     relieved the auditor
of his local tax duties.
The Legislature strengthened the power of the state
auditor in     by giving the office
the power to examine, audit, and
adjust accounts. However, it also
made the auditor responsible for
disbursements and the overall
accounting system. This dual role
presented the auditor substantive
independence issues in carrying
out the assigned duties. In     the
General Assembly separated the
duties by transferring the purely
accounting functions to a new
department in the executive
branch. This change resulted in
the state auditor being in an inde-pendent
position to review and
comment on the operational and
financial affairs of North Carolina
State Government.
The state auditor has continued to acquire increased
responsibilities. The Performance Audit Section was
created in     . In     , the General Statutes pertaining to
the state auditor ( G. S. §    -   ) were rewritten to provide
a more comprehensive view of the state auditor’s duties.
The Fraud, Waste, and Abuse Section was created in    
OVERVIEW OF THE OFFICE OF THE STATE AUDITOR
3
Table 1.
STATE AUDITORS SINCE 1868
State Auditors Term
Henderson Adams 1868– 1873
John Reilly 1873– 1877
Samuel L. Love 1877– 1881
William P. Roberts 1881– 1889
George W. Sandlin 1889– 1893
Robert M. Furman 1893– 1897
Hal W. Ayer 1897– 1901
Benjamin F. Dixon 1901– 1910
Benjamin F. Dixon, Jr. 1910– 1911
William P. Wood 1911– 1921
Baxter Durham 1921– 1937
George Ross Pou 1937– 1947
Henry L. Bridges 1947– 1981
Edward Renfrow 1981– 1993
Ralph Campbell, Jr. 1993– present
Source: North Carolina Manual
and was given subpoena power by the General Assembly.
The list of entities subject to audit also has grown. For
example, the state auditor was required to perform finan-cial
and compliance audits of the North Carolina
Partnership for Children and the local Smart Start part-nerships
when that program was established in     .
In November     , the Office of the State Auditor
moved its main location from the Legislative Office
Building to the newly- renovated Old Revenue Building.
This move allowed for a more modern work environ-ment,
training facilities with audio- visual and on- line
capabilities, increased conference room space, and
expanded storage facilities.
MISSION, COMMITMENT, AND GOALS
The mission of the North Carolina Office of the State
Auditor is to independently evaluate the state’s fiscal
accountability and public program performance for
North Carolina’s citizens and others. The office strives to
assure that state govern-ment
is executing its
management responsi-bilities
in compliance
with applicable laws,
rules, regulations, and
policies. The office also
evaluates whether suffi-cient
management con-trols
and policies exist to
enable state agencies to
most efficiently and effectively use public resources.
The professional staff, located in Raleigh and nine
branch locations ( Figure 1), is committed to producing
thorough, independent audits and examinations to
develop useful and practical recommendations to
improve State governmental services. The office strives
to present fair and independent findings and recom-mendations
as well as promote cooperative efforts with
4
OVERVIEW
SENIOR MANAGEMENT TEAM ( left to right): Wesley Ray, Lenny Superville, Lillian Whitaker, Bobby Matthews, Shelia Thompson, Rob Hillman, State
Auditor Ralph Campbell, Martin Vernon, Wanda Lairson, Vicky Young, Cindy Gilliam, George Walls, Dennis Patterson. Not shown: Glenda Shields
Chief Deputy State Auditor
George Walls
the agencies and institutions under its oversight.
The key goals of the Office of the State Auditor are to:
n report the accountability of state government to the
citizens and other customers
n provide responsive professional support to all client
agencies as well as to provide responsive, professional
and administrative support to employees to enable
them to best complete their responsibilities
n conduct timely, cost- effective audits in accordance
with applicable professional standards
n ensure staff are fully qualified to perform required tasks
n implement new initiatives wherever possible to be more
proactive in strengthening governmental management
STATUTORY AUTHORITY
General Statutes §    -   .  -   .   outline the duties and
responsibilities of the state auditor. These statutes man-date
that all state agencies and entities partially or entirely
supported by public funds are subject to audit by the state
auditor. These audits independently evaluate public pro-gram
performance for the General Assembly, governor,
executive departments and agencies, governing bodies,
and the general public. Specifically, the state auditor inde-pendently
examines and makes findings of fact on
whether State agencies:
n established adequate operating and administrative
procedures, reporting systems, and elements of man-agement
control
n provided financial and other reports that disclose fairly,
consistently, fully, and promptly all information nec-essary
to demonstrate program performance
n collected, deposited, and properly accounted for all
revenues and receipts arising from activities
n conducted programs and expended funds in an effi-cient
and economical manner as well as in compli-ance
with applicable laws and regulations
n determined that programs effectively served the
legislative intent
General Statutes also mandate that specific audits such as
the largest audit, the State’s Comprehensive Annual Financial
Report ( CAFR), be conducted. The law mandates that all
audits be conducted in accordance with appropriate pro-fessional
standards and that the state auditor be inde-pendent
of the organizations audited.
ORGANIZATION
The state auditor is a constitutional officer elected
statewide every four years. The state auditor is a member
of the Council of State which also includes the governor,
lieutenant governor, secretary of state, state treasurer,
superintendent of public instruction, attorney general,
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
5
Morganton
Winston- Salem
Greensboro Raleigh
Greenville
Wilmington
Fayetteville
Charlotte
Elizabeth City
Asheville
n
n
n
n
n
n
n
n
n
n
Figure 1.
OFFICE OF THE STATE AUDITOR MAIN OFFICE AND BRANCH LOCATIONS
commissioner of agriculture, commissioner of labor,
and commissioner of insurance.
The Office of the State Auditor’s senior management
team, which includes the state auditor, chief deputy state
auditor, general counsel, deputy state auditors, personnel
officer, director of information resource management,
and the accounting manager, is made up of professionals
with specialties in management, law, personnel, technol-ogy,
and accounting. This group oversees all the admin-istrative,
audit, and investigative functions of the office.
The office’s administrative functions include account-ing,
clerical support, information resource management,
and personnel. Accounting staff oversee the budget,
expend the funds allotted, handle the purchasing and pay-roll
functions, maintain the supplies inventory, and super-vise
the printing operation that produces the reports
released by the Office of the State Auditor. Clerical sup-port
staff are responsible for reception, word processing,
filing, and other clerical support duties. The information
resource management group administers office automa-tion,
data communications, and management informa-tion
systems for the office. Personnel staff handle the
recruitment, hiring, salary administration, and employee
benefits functions.
Two deputy state auditors are responsible for the
office’s field audit activities. Audits are assigned to audit
managers according to audit type and geographic
location. The audit managers each have several audit
teams that are led by audit supervisors. These audit teams
conduct the audit field work and draft audit reports.
Research and training staff support the audit function
by coordinating continuing professional education, over-seeing
professional policies and procedures, and coordi-nating
reviews of audits to ensure quality. This group also
provides a training program for non- audit personnel.
The Fraud, Waste, and Abuse ( Hotline) staff is charged
6
Smart Start
Audit Teams
NGO MIS Staff Purchasing Budget Office
Specialist
Manager
Nongovernmental
Audits
Raleigh and
Branch Offices
Audit Teams
Field Audit
Managers
Budget/
Accounting
Director
MIS
Receptionist
Director of
Investigative
Audits
( Hotline)
Deputy
for General
Government and
Performance Audits
Managers
General
Government
Audits
Manager
Performance
Audits
General
Government
Audit Teams
Performance
Audit
Teams
Director of
Information
Systems
Audits
Director
for
Training
Information
Systems
Auditors
Deputy
for
Administration
Deputy for Field
and
Nongovernmental
Audits
Personnel
Officer
Support
Staff
Audit
Publication
Coordinator
Chief Deputy
State Auditor
Executive
Secretary
Legislative
Liaison ( vacant)
Confidential
Secretary
Administrative
Assistant
General
Counsel
State
Auditor
Personnel
Staff
OVERVIEW
Figure 2
OFFICE OF THE STATE AUDITOR
ORGANIZATIONAL CHART
with meeting statutory responsibilities ( §    -   .  ( c)   and
   .   ) for investigating instances of alleged improper gov-ernmental
activities and protecting those who may make
such allegations. A manager leads this unit and reports
directly to the chief deputy state auditor.
Many of the professional staff hold professional cer-tifications
as either certified public accountants, certified
fraud examiners, certified government financial man-agers,
certified information system auditors, and certi-fied
public managers. In addition, many of the staff hold
advanced degrees in accounting, business administration,
public administration, and law ( Figure  ).
QUALITY ASSURANCE
The office’s work is governed by strict adherence to
professional standards promulgated by government
agencies and professional organizations including the
Government Auditing Standards Board, the Financial
Accounting Standards Board, the Federal Office of
Management and Budget, the American Institute of
Certified Public Accountants, as well as various state
and federal laws and regulations. These standards
require that auditors remain independent, receive con-tinuing
professional education, and address the role of
the auditee in resolving and tracking findings and rec-ommendations.
The Office of the State Auditor has a control system
to ensure the quality of audit work. The system includes
supervisory review of all work product as well as man-agement
review of audit reports and critical supporting
working papers. Staff who did not participate in an audit
periodically review the work.
An independent CPA firm annually conducts a finan-cial
audit of the office and routinely issues a clean opinion
of its financial statements. Additionally, the office receives
a peer review every three years under the direction of the
National State Auditors Association. During the peer
review, members of audit staffs from other states review
the office’s quality assurance system and working papers
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
7
SUPPORT STAFF ( left to right): Pete Rose, Gail Musser, Ann Moore,
Becky Weaver, Debbie Rice, Gayle Lemons, Supervisor Pat Heggie,
Jazel Henning, Debbie Richerson, Mary Days. Not shown: Kay Denning
AUDIT MANAGERS ( left to right): Lee Linker, Linda Hollar, David
Nance, Joyce Flowers, Jeff Henderson, Janet Hayes, Dale Place, Stan
Wesner. Not shown: Faye Steele
RESEARCH AND TRAINING ( left to right): Allen Hicks,
Director Beth Wood
8
OVERVIEW
Figure 3.
AGENCY PERSONNEL BREAKDOWN
BY JOB DESCRIPTION
Figure 4.
ADVANCED DEGREES AND PROFESSIONAL
CERTIFICATIONS HELD BY STAFF OF THE
OFFICE OF THE STATE AUDITOR
78.9% Field Auditors
5.7% Information Systems Auditors
5.2% Administration
5.2% Support
2.6% Budget/ Personnel
2.6% Management Information Systems
30.5% Certified Public Accountant
18.6% Masters Degree
4.2% Certified Fraud Examiner
5.7% Certified Information systems Auditor
2.6% Certified Internal Auditor
2.1% Certified Government Financial Manager
2.1% Juris Doctor
1.1% Certified Public Manager
Figure 5.
DISTRIBUTION OF AUDIT HOURS TO EACH
AUDIT TYPE FOR THE 2002– 2003 FISCAL YEAR
80% Financial Audits
11% Performance Audits
6% Information Systems Audits
3% Fraud, Waste, and Abuse Investigations
Table 2.
STATEMENT OF REVENUES AND
EXPENDITURES BUDGETARY ( CASH) BASIS
Fiscal Year Ended June 30, 2003 ( Unaudited)
Expenditures
Personnel Services $ 11,127,719.80
Purchased Services 1,327,064.40
Supplies 51,226.35
Property, Plant and Equipment 234,491.24
Other 33,286.55
Transfers Out 36,473.00
Total Expenditures $ 12,810,261.34
Revenues
Sale of Equipment $ 50.00
Transfers In ( Billed Services) 2,694,220.00
Transfer in from CCPS for Terrorism 140,000.00
Transfer in from Juvenile Justice 100,000.00
Total Revenues $ 2,934,270.00
State Appropriations $ 9,875,991.34
for compliance with auditing standards. The most recent
peer review was performed during June     and
resulted in a clean opinion.
FINANCES
The office receives most of its funding through appro-priations
from the General Assembly. In addition, state
agencies, universities, and community colleges are billed
on a cost- reimbursement basis for work performed in fed-eral
compliance audits as specified in the federal Office of
Management and Budget Circular A-    . On request, the
office audits certain other public entities on a cost- reim-bursement
basis.
Salaries and benefits account for most expenditures
( Table  ). In addition, the office recently has made sig-nificant
investments in computer technology to improve
the effectiveness and efficiency of audits. During the
    ‒     fiscal year, the Office of the State Auditor com-pleted
its move to the newly renovated Old Revenue
Building. This move increased capital expenditures due
to the need to purchase furniture and fixtures as well as
associated moving expenses.
TYPES OF SERVICES
The Office of the State Auditor conducts financial,
performance, and information systems audits as well as
fraud, waste, and abuse investigations. Financial audits
were the largest segment (   %) of audit hours for the
    ‒     fiscal year. Each type of engagement is
discussed in more detail in Figure  .
9
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
T E C H N O L O G Y
The digital revolution of the last decade has left virtually no
segment of our society untouched, including government agen-cies
and operations. As government has changed, auditors
also have had to change to fulfill their roles as watchdogs.
Miniature calculators that replaced unwieldy adding
machines were but the first step in that evolution of the
accounting industry. Over the last decade, every team in the
Office of the State Auditor has been equipped with laptop
computers, portable printers and other technological equip-ment
to help them perform their duties.
In the last fiscal year, the office instituted a number of tech-noligical
innovations that have driven the era of green eye-shades
and armbands even deeper into the past.
Those innovations, highlighted in this annual report, include
a unique digital distribution system that makes all of our
reports available to state officials and the public at the touch
of a button; an expanding pilot project that replaced the tan-gled
nest of wiring connecting team members with new wire-less
units that communicate by radio signal; and specialized
accounting software for every field auditor that electronically
analyzes financial data, and stores work papers that once
required multiple boxes on a single compact disc.
And we are not finished. We are constantly assessing tech-nology
improvements that will make us more efficient, more
effective and more accountable to the public we serve.
S FINANCIAL AUDITS
11
taff in the Financial Audit Section audit state
agencies, universities, community colleges, clerks of
superior court, and Smart Start nonprofit organizations.
Most audits are required as part of the statutory duties
of the state auditor or to comply with requirements of
the Federal government. Some audits are performed at
the state auditor’s discretion to ensure that all agencies
are properly reporting their financial conditions.
The Office of the State Auditor spent the greatest per-centage
of hours ( 42%) to perform annual financial state-ment
audits/ reviews of the State’s sixteen universities
and fifty- nine community colleges ( Figure 6). One of its
largest financial audits is the state’s Comprehensive Annual
Financial Report ( CAFR), which accounted for 15 percent
of staff hours. The CAFR
contains the annual financial
statements for the state of
North Carolina as a whole.
Another major financial audit
project, accounting for 17
percent of staff time, is the
state’s Single Audit Report. The
Single Audit Report contains
the results of the audit of the
state’s financial statements as
well as the audit of the state’s
compliance with laws and
regulations pertaining to fed-eral
grant programs. The
office also periodically audits
selected fiscal controls of
clerks of superior court and
general government agen-cies.
The non- governmental audit staff conducts financial
and compliance audits of the organizations participating
in the Smart Start program, including the statewide coor-dinating
agency ( the North Carolina Partnership for
Children, Inc.) and the individual local partnerships.
Smart Start is an early childhood development program
designed to prepare children to begin school healthy and
ready to succeed. Currently, 82 Smart Start partnerships
operate throughout the state. Due to the increasing num-ber
of local partnerships and our limited staff resources,
some local partnership audits were performed by local
CPA firms under contract with the Office of the State
Auditor. The state auditor’s staff reviews draft reports of
these audits for compliance with auditing standards.
AUDIT RESULTS SUMMARY
2002– 2003
For the ninth consecutive
year, the state auditor issued
an unqualified opinion1 on
the state’s financial state-ments.
For the year ended
June 30, 2003, this opinion
was contained in the CAFR
prepared by the Office of the
State Controller.
The state of North Car-olina
also received the Cer-tificate
of Achievement for
Excellence in Financial Report-ing
from the Government
Finance Officers Association
for the ninth consecutive
year. This award is given to
Figure 6.
DISTRIBUTION OF FINANCIAL AUDIT HOURS
TO EACH AUDIT TYPE FOR
THE 2002– 2003 FISCAL YEAR
42% Universities and Community Colleges
15% Comprehensive Annual Financial Report
17% Single Audit
10% Smart Start
8% Clerks of Court
1% Component Units
7% General Government Agencies
12
FINANCIAL AUDIT SECTION
government units whose CAFR achieves the highest stan-dards
in government accounting and financial reporting.
In conjunction with the audit of the state’s financial
statements, the state auditor issues a report on compli-ance
and internal control over financial reporting in the
Single Audit Report. Twenty- five findings of non- com-pliance
and/ or weaknesses in internal control related to
the financial statement audit were reported. These find-ings
disclosed internal control deficencies related to
investing activities, refunds of retirement contributions
and motor fuel taxes, billing and collection of water and
sewer fees, fixed asset records, access to computer sys-tems,
payment of unemployment insurance claims and
health plan administrative charges, and year- end finan-cial
reporting.
With regard to compliance with federal program
requirements, the state auditor issued a qualified opin-
Table 3.
SINGLE AUDIT FINDINGS
FOR 2002– 2003
Compliance Requirement Number of Findings
Subrecipient Monitoring 20
Allowable Cost / Cost Principles 18
Cash Management 4
Procurement and Suspension, and Debarment 11
Reporting 1
Matching, Level of Effort, and Earmarking 2
Eligibility 6
Equipment and Real Property Management 2
Period of Availablity of Federal Funds 1
Special Tests and Provisions 5
Total 70
13
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
ion1 on certain federal programs due to material weak-nesses
and other reportable conditions,. In total, audi-tors
identified $ 14.9 million in questioned costs resulting
from 70 identified audit findings ( Table 3).
In addition to reporting on the CAFR and Single
Audit at the statewide level, the office publishes in sep-arately
issued reports the audit findings and recom-mendations
from CAFR and Single Audit work for each
individual government agency. The agencies for which
such findings and recommendations were issued are
highlighted in Table 4. Copies of reports issued by the
office of the state auditor may be requested at our web
site, www. ncauditor. net, or by calling ( 919) 807- 7500.
Reported findings from university and community col-lege
audits/ reviews for fiscal year 2003 primarily related
to internal control weaknesses in areas such as bank
account reconciliation, fixed assets, cash receipts, and
financial statement preparation. Table 5 presents a list of
these university and community colleges, as well as audits
of financial statements of other agencies prepared in
accordance with generally accepted accounting principles.
Table 4.
OFFICE OF THE STATE AUDITOR
REPORTS OF FINDINGS AND RECOMMENDATIONS
FROM CAFR AND SINGLE AUDIT PRIMARY
GOVERNMENT AGENCIES
Reports Issued During Year Ended June 30, 2003
Findings Reported
Audited Entity Yes No
Department of Administration 1
Department of Commerce 1
Dept. of Crime Control & Public Safety 2
Dept. of Environment & Natural Resources n
Department of Revenue 1
Department of the State Treasurer 5
Department of Transportation 9
Employment Security Commission 3
Teachers and St. Employees
Major Medical Plan 10
Office of State Budget and Management n
Office of the State Controller n
Health and Human Services 3
Department of Public Instruction 2
Department of Correction 2
14
FINANCIAL AUDITS
In the fiscal 2003 Clerk of Superior Court audits, the
office of the state auditor noted weaknesses in areas such
as separation of duties, timely deposits, bank reconcili-ations
and proper recording of bonds. In the 2003 fiscal
control audits of general government agencies, internal
control weaknesses were reported in such areas as pen-sion
payments, allowance payments, capital assets, pay-roll,
personal service contracts and ticket sales. Fiscal
control audit reports issued during the year ended June
30, 2003, appear in Table 6.
Smart Start findings issued during 2002– 2003 focused
on the lack of policies and procedures, the need for
proper internal controls for processing of transactions,
the assignment of tasks to eliminate separation of duties
problems, contract management and monitoring, com-petitive
bidding, and financial presentation and report-ing.
Audit reports issued during the year ended June 30,
2003 are presented in Table 7.
NOTES
1. An unqualified opinion is an opinion expressed without any reserva-tions
by an auditor on the financial statements. Audited entities that
receive unqualified opinions are considered, in the auditor’s profes-sional
judgment, to have presented fairly in all material respects their
financial statements for the period audited.
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Findings Reported
Audited Entity Yes No
Universities and Affiliates:
Appalachian State University n
East Carolina University n
Elizabeth City State University n
Fayetteville State University n
NC Agricultural and Technical University n
North Carolina Central University n
North Carolina School of the Arts n
North Carolina State University n
University of North Carolina at Asheville n
University of North Carolina at Chapel Hill n
University of North Carolina at Charlotte n
University of North Carolina at Greensboro n
University of North Carolina at Pembroke n
University of North Carolina at Wilmington n
Western Carolina University n
Winston- Salem State University n
NC School of Science and Mathematics n
University of North Carolina Hospitals n
Community Colleges:
Alamance Community College n
Beaufort County Community College n
Bladen Community College n
Blue Ridge Community College n
Brunswick Community College n
Cape Fear Community College n
Carteret Community College n
Catawba Valley Community College n
Central Carolina Community College n
Cleveland Community College n
Coastal Carolina Community College n
College of the Albemarle n
Craven Community College n
Davidson County Community College n
Edgecombe Community College n
Fayetteville Technical Community College n
Forsyth Technical Community College n
Johnston Community College n
Findings Reported
Audited Entity Yes No
Community Colleges continued:
Table 5.
OFFICE OF THE STATE AUDITOR REPORTS OF FINDINGS AND RECOMMENDATIONS
Reports Issued During Year Ended June 30, 2003
Guilford Technical Community College n
Halifax Community College n
Haywood Community College n
Isothermal Community College n
James Sprunt Community College n
Lenoir Community College n
Martin Community College n
McDowell Technical Community College n
Mitchell Community College n
Montgomery Community College n
Nash Community College n
Pamlico Community College n
Pitt Community College n
Randolph Community College n
Richmond Community College n
Roanoke- Chowan Community College n
Robeson Community College n
Rockingham Community College n
Sampson Community College n
Sandhills Community College n
Southeastern Community College n
Vance- Granville Community College n
South Piedmont Community College n
Stanly Community College n
Wake Technical Community College n
Wayne Community College n
Wilson Technical Community College n
Other:
NC Ports Railway Commission n
NC State Ports Authority n
NC State Ports Authority Bulk Handling Facility n
U. S. S. North Carolina Battleship n
Town of Butner Water and Sewer Systems n
Global Transpark n
Clean Water and Drinking Water Funds n
State Treasurer Investment Pool n
Wireless 911 Board n
15
16
FINANCIAL AUDITS
Findings Reported
Audited Entity Yes No
Clerks of Superior Court continued:
Table 6.
OFFICE OF THE STATE AUDITOR AUDITS OF FISCAL CONTROLS AT
CLERKS OF SUPERIOR COURT AND GENERAL GOVERNMENT AGENCIES
Reports Issued During Year Ended June 30, 2003
Findings Reported
Audited Entity Yes No
Clerks of Superior Court:
Alamance County Clerk of Superior Court n
Alexander County Clerk of Superior Court n
Alleghany County Clerk of Superior Court n
Anson County Clerk of Superior Court n
Ashe County Clerk of Superior Court n
Avery County Clerk of Superior Court n
Buncombe County Clerk of Superior Court n
Burke County Clerk of Superior Court n
Cabarrus County Clerk of Superior Court n
Caldwell County Clerk of Superior Court n
Caswell County Clerk of Superior Court n
Catawba County Clerk of Superior Court n
Chatham County Clerk of Superior Court n
Cherokee County Clerk of Superior Court n
Cleveland County Clerk of Superior Court n
Davidson County Clerk of Superior Court n
Davie County Clerk of Superior Court n
Durham County Clerk of Superior Court n
Forsyth County Clerk of Superior Court n
Gaston County Clerk of Superior Court n
Graham County Clerk of Superior Court n
Granville County Clerk of Superior Court n
Guilford County Clerk of Superior Court n
Iredell County Clerk of Superior Court n
Jackson County Clerk of Superior Court n
Johnston County Clerk of Superior Court n
Lincoln County Clerk of Superior Court n
Macon County Clerk of Superior Court n
Madison County Clerk of Superior Court n
McDowell County Clerk of Superior Court n
Mecklenburg County Clerk of Superior Court n
Mitchell County Clerk of Superior Court n
Nash County Clerk of Superior Court n
Orange County Clerk of Superior Court n
Person County Clerk of Superior Court n
Randolph County Clerk of Superior Court n
Rockingham County Clerk of Superior Court n
Rowan County County Clerk of Superior Court n
Rutherford County Clerk of Superior Court n
Stanly County Clerk of Superior Court n
Stokes County Clerk of Superior Court n
Surry County Clerk of Superior Court n
Transylvania County Clerk of Superior Court n
Union County Clerk of Superior Court n
Watauga County Clerk of Superior Court n
Wayne County Clerk of Superior Court n
Yadkin County Clerk of Superior Court n
Yancey County Clerk of Superior Court n
General Government Agencies:
Department of Labor n
Department of Justice n
Department of Agriculture & Consumer Services n
Office of the Lieutenant Governor n
Health and Wellness Trust Fund n
Tobacco Trust Fund n
NC State Fair n
17
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Findings Reported
Audited Entity Yes No
Alamance Partnership for Children n
Albermarle Smart Start Partnership, Inc. n
Alexander County Partnership for Children n
Alleghany Partnership for Children, Inc. n
Anson County Partnership for Children n
Ashe County Partnership for Children n
Avery County Partnership for Children, Inc. n
Beaufort County Partnership for Children n
Bladen County Partnership for Children, Inc. n
Brunswick County Partnership for Children, Inc. n
Buncombe County Partnership for Children, Inc. n
Burke County Partnership for Children, Inc. n
Cabarrus County Partnership for Children n
Caswell County Partnership for Children n
Catawba County Partnership for Children n
Chatham County Partnership for Children n
Children and Youth Partnership
for Dare County, Inc. n
Children’s Council of Watuaga County, Inc. n
Chowan/ Gates/ Perquimans Partnership
for Children n
Cleveland County Partnership for Children, Inc. n
Columbus County Partnership for Children, Inc. n
Communities in Schools of Caldwell County n
Craven County Partnership for Children n
Cumberland County Partnership for Children, Inc. n
Davidson County Smart Start, Inc. n
Davie County Partnership for Children, Inc. n
Down East Partnership for Children n
Duplin County Partnership for Children n
Durham’s Partnership for Children n
Forsyth Early Childhood Partnership n
Franklin/ Granville/ Vance Partnership
for Children, Inc. n
Guilford County Partnership for Children, Inc. n
Harnett County Partnership for Children, Inc. n
Henderson County Partnership for Children, Inc. n
Hertford County Partnership for Children, Inc. n
Hoke County Partnership for Children and Families n
Hyde County Partnership for Children n
Iredell County Partnership for Young Children, Inc. n
Johnston County Partnership for Children, Inc. n
Jones/ Carteret County Partnership for Children n
Lee County Partnership for Children n
Lenoir/ Greene County Partnership for Children n
Table 7.
OFFICE OF THE STATE AUDITOR
FINANCIAL AND COMPLIANCE AUDITS OF SMART START PARTNERSHIPS
Reports Issued During Year Ended June 30, 2003
Madison County Partnership for Children
and Families, Inc. n
Martin/ Pitt Partnership for Children, Inc. n
McDowell County Partnership for Children
and Families, Inc. n
Mecklenburg Partnership for Children n
Montgomery County Partnership for Children, Inc. n
New Hanover County Partnership for Children n
North Carolina Partnership Children, Inc. n
Northampton Partnership for Children, Inc. n
Onslow County Partnership for Children, Inc. n
Orange County Partnership for Young Children n
Pamlico Partnership for Children, Inc. n
Partners for Children and Families, Inc. ( Moore) n
Partnership for Children for Lincoln
Gaston Counties, Inc. n
Pender County Partnership for Children, Inc. n
Person County Partnership for Children, Inc. n
Polk County Partnership for Children, Inc. n
Randolph County Partnership for Children n
Region A Partnership for Children n
Richmond County Partnership for Children n
Robeson County Partnership for Children n
Rockingham County Partnership for Children, Inc. n
Rowan Partnership for Children, Inc. n
Rutherford County Partnership for Children, Inc. n
Sampson County Partnership for Children n
Scotland County Partnership for Children
and Families, Inc. n
Stanly County Partnership for Children, Inc. n
Stokes Partnership for Children n
Surry County Early Childhood Partnership n
The Bertie County Partnership for Children, Inc. n
The Halifax- Warren Smart Start Partnership
for Children, Inc. n
The Mitchell- Yancey Partnership for Children, Inc. n
The Transylvania County Partnership for Children, Inc. n
Tyrrell County Smart Start, Inc. n
Union County Partnership for Children n
Wake County Smart Start, Inc. n
Washington County Child Advocacy Council, Inc. n
Wayne County Partnership for Children, Inc. n
Wilkes County Partnership for children, Inc. n
Wilson County Partnership for Children n
Yadkin County Smart Start Partnership, Inc. n
Findings Reported
Audited Entity Yes No
ELECTRONIC PUBLICATION SYSTEM ( EPS)
For decades, reports from the Office of the State Auditor were
distributed in the same way: hundreds of printed copies stuffed
by hand into envelopes and mailed to state officials and mem-bers
of the public who had requested the reports.
That system changed dramatically in November 2001 when
OSA inaugurated its fully automated Electronic Publication
System.
Using digital technology and the World Wide Web, EPS now
distributes audit reports and management letters electronically
to legislators, state agencies, media outlets and the public.
And with EPS, those customers get only the reports they have
requested from the more than 300 produced each year by the
Office of the State Auditor.
Posting information on a web page available to the public is
an “ old” strategy in the rapidly changing world of technology.
But information posted on the Web is useful only if the person
who wants that information knows it is there.
EPS adds that missing element, automatically sending an
email to people who have subscribed for a specific report the
instant that report is posted. The email includes a live link that
takes the recipient to a synopsis of the report and the full report
itself.
In less than a year, nearly 700 legislators, state officials,
reporters and members of the public have used EPS to target
the reports they want to see.
As a result, audit reports are now distributed more efficiently
and are more readily available than in the past. At the same
time, costs for printing, mailing and handling reports have
dropped dramatically.
19
P erformance audits are defined as… “ an objective and sys-tematic
examination of evidence for the purpose of pro-viding
an independent assessment of the performance
of a government organization, program, activity, or
function in order to improve public accountability and
facilitate decision- making by parties with responsibility
to oversee or initiate corrective action.” Performance
audits are selected through a variety of means including
mandates from the General Assembly; requests from the
Governor, members of the General Assembly, depart-ment/
agency heads, or private citizens; and areas of con-cern
identified in other audits performed by the state
auditor. The objectives of each audit are determined
based on the agency, program, or area to be audited as
well as the reason for the audit.
SUMMARY OF AUDIT RESULTS FOR 2002– 2003
The office issued five performance audit reports this year,
with much of the work conducted by the Performance
Audit staff directed to a few very large audits.
n North Carolina Food Safety System ( a performance
review)
n State Construction Process and the State Construc-tion
Office
n North Carolina Partnership for Children, Inc. and the
Smart Start Program
n Youth Development Centers and Juvenile Detention
Centers within the North Carolina Department of
Juvenile Justice and Delinquency Prevention
n North Carolina State Education Assistance Authority
North Carolina Food Safety System- Performance Review
The United States General Accounting Office ( GAO)
requested the North Carolina state auditor’s office par-ticipate
in its initiative to examine the physical security
of food processing plants and warehouses. As the plan-ning
progressed, the participating states found that no
state agency has the authority to review in detail the phys-ical
security of these establishments. Therefore, the GAO
narrowed its scope to a survey of state activities in this
area. North Carolina participated in this survey. Auditors
conducted on- site survey work from March to September
2002 at the Department of Agriculture and Consumer
Affairs, the Department of Health and Human Services,
and the Department of Environment and Natural
Resources. North Carolina has a fragmented food safety
system that splits responsibility among these agencies as
well as local governmental units. Food establishments
may be visited annually by a number of inspectors for
different regulatory requirements. The split in authority
hampers the effectiveness of the system in some areas.
North Carolina agencies assure safe and wholesome food
through prevention, detection, and response programs.
Additionally, since the events of September 11, 2001,
North Carolina has taken a number of steps to prevent,
detect, and respond to specific food terrorist acts.
The review identified a number of areas that should
be explored in further detail. Those include the limited
enforcement actions that can be taken when violations
are cited at food establishments; inconsistencies in the
frequency of inspections and sample collections; staffing
shortages, lack of risk assessment tools and lack of a
comprehensive list of establishments requiring inspec-tions;
and the lack of technological resources and use of
antiquated laboratory equipment.
The State Construction Process and the State
Construction Office The State Construction Office
PERFORMANCE AUDITS
20
PERFORMANCE AUDITS
( SCO) within the Department of Administration is
charged with implementing, managing, and coordi-nating
the state’s capital improvement program under
the rules and regulations established by the State
Building Commission ( Commission). A number of
other state agencies also have oversight or regulatory
responsibilities for specific parts of state construction
projects. One June 30, 2002, there were 1,316 on- going
state construction projects with a total value of $ 4.6 bil-lion;
640 of those were in the construction phase, with
676 in the design phase. Of the total projects, 196 were
community college projects, 525 were university proj-ects,
and 595 were state agency projects.
This audit of the state construction process and the
State Construction Office, within the Department of
Administration, was undertaken at the discretion of the
state auditor. The major focus of the audit was an exam-ination
of the agency’s project management function,
organization and staffing, and its role in the Higher
Education Bond projects. Fieldwork was conducted from
May 2001 through August 2002.
Overall, the State Construction Office has effectively
provided needed services within the constraints con-tained
in legislation and regulations. However, the report
suggested that increased staffing, additional technology
funds and streamlining could improve the agency’s per-formance.
Auditors had difficulty assigning specific sav-ings
to some recommendations because the savings
would depend on the specifics of future projects. But the
report projected a range of savings from $ 150 million to
$ 400 million if the recommendations are implemented.
North Carolina Partnership for Children, Inc. and the Smart
Start Program This performance audit of the North
Carolina Partnership for Children, Inc. ( NCPC) and the
82 local partnerships was undertaken at the discretion of
the state auditor after numerous questions raised by leg-islators
and the public about the program. The North
Carolina Smart Start program is an early childhood ini-tiative
designed to ensure that young children begin school
healthy and ready to succeed. Smart Start, a public- pri-vate
initiative, provides early care and education funding
The Smart Start unit made its annual pilgrimage for story time to a Raleigh day- care center. Entertaining the preschoolers, from left to right, were
Tigger, Butch Kay; Grumpy, Jackie Taylor; Minnie Mouse, Jennifer Trivette; Scooby Doo, Badir Mamedov; The Beast, Nongovernmental Audit
Manager David Nance; and the Big Bad Wolf, Eric Meymandi. The group performed at KidWorks in mid- April.
21
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
to all of the state’s 100 counties. Legislation called for a
state- level partnership to provide funding and technical
assistance ( NCPC) and county- level partnerships that
would design and implement programs and services to
meet local needs. Currently, 82 local partnerships are
established throughout the state to administer funding
and programs. The North Carolina Partnership for
Children, Inc. and local partnerships are classified as
501( c)( 3) non- profit organizations. Since these partner-ships
are not state entities, they are not required to follow
regulations used by state agencies for purchasing, con-tracting
and other functions. They are only required to
follow regulations explicitly written into the General
Statutes for the Smart Start program.
The major finding was that state appropriations are
the primary funding source for Smart Start, providing
95% of all Smart Start funding. In total, the state has
appropriated $ 1.1 billion for the program since its incep-tion
in 1993 through fiscal year 2001- 02. The majority of
Smart Start funds are spent on either direct services or
contracts and grants to direct service providers. In gen-eral,
expenditures at the 16 partnerships visited were rea-sonable
and necessary, complied with regulations, and
related to program objectives. However, we identified
some unreasonable or unnecessary expenditures that
may be indicative of systemic problems. Other expen-ditures
questioned were prohibited by legislation. The
General Assembly should consider requiring the Smart
Start Program to follow state budgeting regulations.
While local partnerships generally gave NCPC high
marks for providing effective assistance and timely
responses, strategic planning documents at NCPC were
not readily available and were unorganized and incom-plete.
Board minutes at both the state and the local part-nerships
were not consistent, and in some cases, did not
contain adequate documentation. We also noted some
concerns with quorums, attendance, and mandated
memberships. While job descriptions indicated the need
for extensive travel by NCPC monitoring and technical
assistance staff, the actual travel for direct monitoring
and assistance was considerably less. Finally, we noted a
lack of follow- up by NCPC on corrective action taken
by local partnerships regarding monitoring issues. NCPC
should increase its administrative oversight and moni-toring
activities.
Since Smart Start does not track individual children
through its programs and into school, it has a limited
ability to show short- term or long- term benefits from
the program. The Smart Start evaluation program cur-rently
conducted by the Frank Porter Graham Child
Development Institute at the University of North
Carolina at Chapel Hill should be reviewed and validated
by an independent source since the Institute has been
involved in the Smart Start program since its inception.
In general, the approved local program activities relate
to Smart Start’s mission, goals, and objectives. However,
some approved activities may have only a marginal rela-tionship
to the primary mission of the program even
though they address an identified need at the local level.
The State Partnership and the local partnerships should
ensure that all approved activities closely relate to the pro-gram
objectives. A number of the activities at the local
The Beast and the Big Bad Wolf were mobbed by adoring fans at
KidWorks after performing for story time.
22
PERFORMANCE AUDITS
level were the same as those offered through the new
More at Four program. In fact, 43% of the More at Four
grants, representing 63% of the grant funds, were to local
partnerships. Based on similarities between the Smart
Start and More at Four programs, the two should be
combined to improve coordination of services, account-ability
of programs, and reduce administrative costs and
confusion/ competition between the programs.
Youth Development Centers and Juvenile Detention Centers
within the North Carolina Department of Juvenile Justice
and Delinquency Prevention This performance audit of
the youth development centers and juvenile detention
centers within the North Carolina Department of Juvenile
Justice and Delinquency Prevention was undertaken at
the request of the Buncombe County legislative delega-tion.
The scope of the audit encompassed the entire
department with an emphasis on the five youth develop-ment
centers and the 14 detention centers located across
the state. Established in 2000, a major part of the depart-ment’s
mission is to coordinate juvenile justice strategies
in North Carolina by overseeing the state’s juvenile court
offices, development, and detention centers. North
Carolina’s juvenile courts have jurisdiction over anyone
charged with a crime who was under the age of 18 ( up to
age 21 in certain situations) at the time of the offense,
arrest, or referral to court. Juveniles awaiting a court
appearance or ordered held for brief periods generally are
sent to one of 14 detention centers. Ten of those centers
are operated by the state and four by counties, with a total
of 322 beds. Once a juvenile has been judged delinquent
by a court, he is assigned to one of the five youth devel-opment
centers operated by the department’s youth
development division. There are 705 youth development
center beds in those five centers.
The youth development centers are housed in facili-ties
that are, for the most part, over 60 years old. Half of
the detention centers are 30 to 40 years old. Most centers
are in poor physical condition, and the age and
construction of the centers increases the security risks.
Two of the five youth development centers do not have
security fences, and the use of electronic security meas-ures
is virtually non- existent. The centers’ campus- style
layouts further increase security risks by requiring offend-ers
to be moved from secured housing units to less
secure buildings for meals, classes, or other reasons.
Abandoned buildings obscure lines of sight allowing
opportunities for escapes. Poor building layouts and high
juvenile- to- staff ratios lessen the safety for both offend-ers
and staff. Some detention centers are overcrowded,
which can increase the stress on both offenders and staff.
Due to inconsistent policies and procedures, staff is con-fused
over what, when, and to whom to report sus-pected
incidents of abuse and neglect. Estimated repair
and renovation costs for the existing centers is about $ 44
million. The department estimates construction of three
new youth development center facilities to replace the
existing ones to be $ 90 million.
The youth development center schools, classified as
alternative schools by the state, use North Carolina’s
standard course of study even though the requirements
are not applicable to a substantial number of juvenile
offenders. Approximately 61% of offenders have specific
identified therapeutic and educational needs when com-mitted
to the centers, with about 60% of them not func-tionally
literate according to center teachers. On average,
only 13.2% of the offenders complete a GED while at
the centers. Further, vocational programs varied at the
centers, community leaders had little input into the voca-tional
education courses offered, and there was no sys-tematic
follow- up to assess vocational training or to assist
juveniles in obtaining jobs in areas where they had
received training. Youth development center instruc-tional
budgets were not sufficient, did not include any
funding from local education authorities, and did not
have any input from education staff at the centers.
There is a lack of clarity about the importance and role
of clinical treatment and rehabilitation in the system.
23
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Programs are disorganized, lack resources, and may not
be allocated enough time. However, the assessment and
treatment center approach now being used offers the
potential for significant improvement. While several model
programs are on- going within the system, major short-comings
noted included the need for more group treat-ment,
family treatment, and increased one- to- one therapy.
Provision of these services would better justify the state’s
$ 55,029 annual investment in each juvenile offender.
Sixty- two percent of the department’s staff ( 1,233 of
1,994) work in the Youth Development Division. Sixty-one
percent of the vacant positions were at the youth
development and detention centers, with vacancies
remaining open for over a year on average. While there
has been extensive job shifting since the creation of the
department, the centers have suffered a net loss of 211
positions, mostly due to cuts caused by the state’s budget
situation. Turnover rates for the centers have been high,
averaging almost 20% annually, with turnover rates for
some positions as high as 55% ( cottage parent). That has
resulted in uneven staff distribution for the centers.
DJJDP has not established target ratios for the different
types of staff at the centers to help balance staffing.
Staff training polices were inconsistent and appeared
to be inadequate for certain types of employees. The
centers have not consistently provided the required
orientation and in- service training for employees, and
some of the training provided was not timely. Some cen-ter
personnel working directly with juvenile offenders,
for instance, did not receive basic training for seven to
eight months after they were hired. Most delays in train-ing
were related to staff and budget shortages.
DJJDP management has faced a number of obstacles
in forming a single, cohesive entity from two separate
divisions in different agencies. While the process of
updating the ten- year- old administrative code brought
over from DHHS and AOC with the respective divisions
continues, the lack of formal policies and procedures
hampers effective operations in the centers since there
is a mixture of old and new policies and procedures.
Changing from a correctional to a therapeutic model
Condemned and abandoned buildings like this one at Stonewall Jackson
Youth Detention Center are a security risk for the youth and staff., audi-tors
found
Wall and ceiling damage at Buncombe Detnetion Center was typical of
what auditors found in the state’s juvenile justice facilities, many of
which date back to the 1930s.
24
PERFORMANCE AUDITS
has led to some communication problems, with educa-tional
or treatment experts in the central office com-municating
directly with specialists at the centers. This
situation has at times left the center directors, who have
overall responsibility for center operations, out of the
information loop and caused communication problems
between the field staff and the central office.
A second major obstacle faced by agency management
has been the absence of readily available data on the juve-nile
population. Prior to 1999 and the formation of the
Department of Juvenile Justice and Delinquency
Prevention, there was no centralized, automated infor-mation
system for juvenile offender data. The department
has been working on a statewide database to manage and
track juvenile offenders. As of January 2003, it has spent
$ 9.8 million in federal and state funds to develop and
implement the project. A major concern for the NC- JOIN
( North Carolina Juvenile Online Information Network)
project is a stable source of funding to complete this proj-ect.
The agency estimates that $ 3.9 million is needed to
complete the design and implementation statewide by
the target date of June 2007. An additional $ 9.3 million is
needed to maintain the technical infrastructure
North Carolina State Education Assistance Authority This
performance audit of the North Carolina State Educa-tion
Assistance Authority was undertaken at the discre-tion
of the state auditor, concentrating on the state
student loan programs. The scope of the audit encom-passed
all operations of the authority, but focused mainly
on the Health, Education, and Welfare Division, which
handles the state- funded loan programs. The Teaching
Fellows Program, administered by the Public School
Forum of North Carolina, also was included since the
authority became responsible for cash collections for the
program during the audit period.
25
PERFORMANCE AUDITS
While the state student loans were not intended to
cover the entire cost of college attendance, the pro-grams’
funding limits are meeting a decreasing portion
of students’ needs over time. Thus, they may not be
meeting the goals of the programs to encourage stu-dents
to repay their state loans through employment in
North Carolina in their selected field. Awarded loan
amounts for most programs have not been adjusted over
the years to reflect the increased cost of tuition since
1989 ( 141% at public universities and 251% at commu-nity
colleges). Students are reported to have an average
loan debt of over $ 12,500 at graduation, even with other
loans, scholarships, and grants. The only program for
which awarded loan amounts have been increased is the
Teaching Fellows Program.
The goal of all state funded loan programs is to pro-vide
financial resources to students, with the hope that
these resources will be repaid through employment in
North Carolina for the specified number of years.
Examination of loan payment data shows that 93.9% of
the loans administered by the authority are repaid, with
72.0% repaid through service. Adding in the data for the
Teaching Fellows Program increases this percentage to
73.2% for repayment through service. Merit- based loans
have a lower default rate than need- based loans. The
Nurse Education Scholarship Loan Program, which is
need- based, has the highest overall default rate at 9.3%.
The authority does not have specific, written guidelines
for administering each of the loan programs, which can
lead to inconsistent administration.
The authority uses two separate databases to admin-ister
the state student loan programs from application
through repayment. This is the result of the merger of
the Health Science and Math Loan Program Division and
the Health Education and Welfare Loan Programs
Division. The two databases contain erroneous and
incomplete monitoring data. They do not have edits in
place to recognize errors, make corrections, or inform
staff that errors have occurred. To improve efficiency and
effectiveness, the authority should develop a combined
database that incorporates edits to flag questionable data.
Additionally, the number of authority staff has increased
by only 6.5% from fiscal year 1997- 98 through 2001- 02,
while the number of loan awards for all loan types has
increased by 86.8%. The Health, Education, and Welfare
Division is handling over 7,500 state student loans in var-ious
stages, an average of 577 loans per person.
Reports issued by the Office of the State Auditor are available
on the web site at www. ncauditor. net under “ Audits.” Printed
copies may be requested by calling ( 919) 807- 7500.
W I R E L E S S N E T W O R K I N G
Equipping audit teams with laptop computers, printers, and
other devices to help them perform their work in remote loca-tions
comes with an immediate and obvious drawback: a
“ spaghetti bowl” of power cords, cables, and connecting lines
that allow information to be shared.
In the tight quarters auditors frequently are asked to use on
field assignments, the wiring sometimes threatens to overwhelm
the equipment itself.
Over the past year, the Office of the State Auditor has imple-mented
a pilot project using wireless technology to resolve that
nagging problem. Field auditors can communicate with each
other and with their home base using radio technology rather
than hard- wired computer systems.
Wireless access, particularly at sites which must be audited
every year, allow field auditors to transmit data between the
audit site and their home base, or among themselves, without
a sprawling mass of wires.
While the pilot project has tested the effectiveness of using
wireless systems to transmit information, it also has tested secu-rity
functions that keep the radio signals and the confidential
data they carry from being intercepted.
27
A INFORMATION SYSTEMS AUDIT
s the State’s operations grew more complex and
sophisticated, with an increased dependence on auto-mated
systems and controls, it became necessary to
devote special attention and resources to those systems.
As a result, the state auditor created the Information
Systems ( IS) Audit division. This section performs audits
on the computer system’s general and application con-trols
that protect an agency’s data. In addition, IS audit
staff members assist other staff auditors in retrieving finan-cial
and statistical data for analysis within their respective
audits as well as provide technical expertise on the audi-tee’s
electronic data processing systems.
SUMMARY OF AUDIT RESULTS FOR 2002– 2003
The reports and other activities of the IS audit division
conducted during 2003– 2003 include:
Department of Transportation— State Titling and
Registration System ( STARS), state Automated Drivers
License System ( SADLS), and International Registration
Plan ( IRP) The primary objective of this audit was to
evaluate controls for the State Titling and Registration
System ( STARS), the State Automated Drivers License
System ( SADLS), and the International Registration Plan
( IRP) applications. We also followed up on prior DOT
information systems access controls audits. The scope
of our audit included a review of application controls
for the three applications and a determination what cor-rective
actions have been taken to resolve the prior access
controls audit findings. Application controls for the appli-cation
systems include data completeness, data accuracy,
table maintenance, user access, processing, and data
backup and recovery. The purpose of application con-trols
is to ensure that as data passes through the appli-cation,
it is complete, accurate, timely and protected
from unauthorized access.
Data completeness controls are designed to ensure
that all transactions are entered into the system once and
only once, that all errors are corrected without any being
lost, duplicated or added, that all transactions are
processed, that databases are updated completely, and
that all output reports are complete. Our audit did not
identify any significant weaknesses in completeness con-trols
for the STARS and IRP applications. However, we
identified a weakness in the completeness controls for
SADLS Motor Vehicle Records ( MVR) online customer
component. This component was designed to only track
one payment per customer each calendar month.
Consequently, multiple payments in the same month by
a customer must be manually calculated and posted to
the database, overwriting the previous amount posted
by the system.
Data accuracy controls ensure that the details of trans-actions
are entered and processed correctly, and that
printed output is not distributed to the user until it is
checked for reasonableness. Our audit did not identify any
significant weaknesses in accuracy controls for the STARS
and IRP applications. However, we identified a weakness
in the accuracy controls for SADLS MVR request. We
found weaknesses in the controls over the payments
received for mail- in Motor Vehicle Report ( MVR) requests.
Controls do not ensure that all payments received are
entered into the system. Systems use tables to make com-putations
and to verify valid codes during data entry.
Table maintenance controls ensure that tables used
in processing include correct and timely values. Our
audit did not identify any significant weaknesses in the
Table maintenance for the STARS and IRP applications.
However, we identified a weakness in the table mainte-nance
for SADLS Duplicate Driver License Internet Web
interface application.
User access controls ensure that only authorized per-sons
are able to inquire about, record, change, or delete
data, that electronic signatures used to approve transac-tions
are valid, that only authorized users receive printed
reports, and that blank negotiable instruments are pro-tected.
We identified several conditions related to user
access for STARS, IRP and SADLS applications, which
should be addressed to improve user access controls.
Processing includes all of the activities associated
with running production jobs. Our audit did not iden-tify
any significant weaknesses in processing for the
STARS, IRP, and SADLS applications.
Data backup and recovery procedures ensure that
the system can be restored if a disaster destroys the pri-mary
data files. To be effective, the backup data files
must be stored in a secure offsite location, and all essen-tial
files should be included. The backup tapes should be
stored in an environmentally safe facility far enough
away from the computer center so that the backups and
the center cannot be both destroyed by a single disaster.
The STARS, IRP, and SADLS application run on the
state’s mainframe computer. Transactions for these appli-cations
are entered and processed as real time updates
to the databases. In the event the mainframe has a dis-ruption
in service, DOT has not established alternative
procedures or provisions to recover these transactions
for the STARS, IRP, or SADLS applications.
Information Systems Access Controls The access
control environment consists of access control software
and information security policies and procedures. We
followed up on prior year access control findings for
DOT to determine corrective actions that have been
taken to resolve the prior audit issues. We found that
many of the same conditions we observed in the prior
audit still exist. DOT is currently in the process of resolv-ing
the majority of these access control findings from
the prior year. Until all findings are resolved, the DOT
access control environment is still not adequate to pro-tect
the critical and sensitive information from unau-thorized
access.
North Carolina State University – General Controls Review
We conducted an Information System ( IS) audit at North
Carolina State University from May 28, 2002, through
October 15, 2002. The primary objective of this audit
was to evaluate the IS general controls in place during
that period. General controls include general security
policies, access controls, program maintenance, physi-cal
security, operations, systems software, telecommu-nications,
and disaster recovery. The general controls
review indicated that all users accessing the University’s
intranet could view operations staff production job out-put
logs via the web using a web browser, such as
Internet Explorer. We also found that the firewall viola-tion
reports are not reviewed for irregular or unautho-rized
activity.
UNC Hospitals— General Controls Review We conducted
an Information System ( IS) audit at UNC Hospitals from
June 3, 2002 through August 30, 2002. The primary
objective of this audit was to evaluate the IS general con-trols
in place during that period. We reviewed the access
controls for the UNC Hospitals mainframe and a UNIX
server. We found several weaknesses in access controls.
We also found that application programmers have the
ability to move and run programs in the Unix produc-tion
environment. We noted that employee access to
computer room was not adequately restricted. The
Hospital does not have a disaster recovery plan in place.
All backup tapes are not adequately stored off site.
Western Carolina University— General Controls Review
We conducted an Information System ( IS) audit at
28
INFORMATION SYSTEMS AUDIT
Western Carolina University from November 18, 2002,
through December 10, 2002. The primary objective of
this audit was to evaluate the IS general controls in place
during that period. We found several weaknesses in
access controls.
UNC Asheville— General Controls Review We conducted
an Information System ( IS) audit at The University of
North Carolina at Asheville from November 13, 2002,
through December 13, 2002. The primary objective of
this audit was to evaluate the IS general controls in place
during that period. We found that the University does
not have written policies and procedures that address key
information technology areas. We found that the
University has not performed a risk assessment of its
information technology resources and information. We
also found that a user who is responsible for Quality
Assurance and Security Administration also has privileges
assigned that grant him the authority equivalent to those
of a Systems Programmer. We found several weaknesses
in access controls. We found that policies and procedures
for user accounts have not been followed.
29
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
A C C O U N T I N G S O F T W A R E
They still are referred to as “ books,” but government financial
records for all practical purposes have long since moved from
paper ledgers and journals to computerized files that automat-ically
record and post transactions.
And the auditors who check those “ books” increasingly are
used digital means to see if they are accurate. In the 2001– 2002
fiscal year, all the field auditors in the Office of the State Auditor
were equipped with specialized auditing software that replaces
physical work papers with digital ones.
The software, loaded on laptop computers, allow auditors to
take random samples of transactions, compute their accuracy
and store the results of that testing on digital work sheets that
are the basis for audit results.
The electronic work papers, which can be burned on a sin-gle
compact disc, replace boxes and boxes of paper records
that previously had to be stored for years.
The Office of the State Auditor also is adding other innova-tions
to improve our business operations, including an on- line
time- reporting system that provides a base for more efficient
audit planning and management. The on- line system also will
help consolidate a number of isolated databases into a single,
shared unit for faster and easier access.
31
FRAUD, WASTE, AND ABUSE ( HOTLINE) T he state auditor is responsible for receiving and
investigating allegations of improper governmental activ-ities
including violations of state or federal laws, rules
or regulations; fraud; misappropriation of state
resources; or substantial and specific danger to the pub-lic
health and safety. The state auditor maintains a 24-
hour, toll- free hotline ( 1- 800- 730- 8477) for state
employees and the general public to report activities they
believe may be illegal or improper. Allegations of fraud,
waste and abuse may also be reported by traditional mail
or via electronic mail at hotline@ ncauditor. net.
Allegations of improper governmental activities,
whether received by telephone or mail, remain confi-dential.
In addition, state law provides protection from
retaliation or discrimination for employees who report
improper or illegal activities to the state auditor.
An investigation is conducted if an allegation appears
to have merit. If the investigation results in the substanti-ation
of the allegation, findings are presented in a special
review report or management letter. When appropriate,
the state auditor refers findings to the State Bureau of
Investigation or other law enforcement agencies.
SUMMARY OF INVESTIGATIVE RESULTS
FOR 2002– 2003
The Investigative Audits Division received 102 allegations
of fraud, waste and abuse during the 2002– 2003 fiscal
year. Of the 81 cases closed during the 2002– 2003 fiscal
year, investigations resulted in the publication of the fol-lowing
special review reports and management letters.
UNC Hospitals/ UNC- Chapel Hill Allegations were
received through the state auditor’s Hotline concerning
payments made to the business Copy Center of Madison,
Wisconsin, for copier toner that was never ordered or
received. During a period of 28 months, checks totaling
$ 10,797 were issued by UNC Hospitals and UNC- Chapel
Hill to the Copy Center of Madison, Wisconsin, in pay-ment
for copier toner. However, department personnel
stated they neither ordered nor received any product
from this company. During the investigation the Copy
Center was able to produce copies of five UPS Delivery
Notifications to UNC Hospitals for unspecified products.
However, no documentation of actual orders was pro-vided,
nor did the delivery notifications indicate the prod-uct
delivered was the toner in question. UNC personnel
responsible for authorizing payment to the Copy Center
said the company was very persistent in its efforts to
obtain payment for the invoices and threatened to turn
the accounts over to a collection service if the invoices
were not paid in a timely manner. In addition, UNC per-sonnel
said a representative of the company stated the
invoices for copier toner were connected to the copier
service routinely used by the University of North Carolina.
However, this copier service, Carolina Copy, denied any
connection between themselves and the Copy Center of
Madison, Wisconsin.
During the investigation, a review of some purported
invoices identified several missing items usually found
on standard invoices such as a purchase order number,
inventory item number and manufacturer listing. In addi-tion,
the price charged by the Copy Center of Madison,
Wisconsin, was significantly higher than the amount
quoted by a local vendor for the same product.
When questioned about the validity of the invoices,
the owner of Copy Center of Madison, Wisconsin,
responded that all orders to his company had been ver-bal
and that toner had in fact been delivered. The owner
32
FRAUD, WASTE, AND ABUSE ( HOTLINE)
was unable to provide documentation to support his
claims and stated he had destroyed the “ UNC records”
because his company no longer did business with the
university.
The investigation identified internal control defi-ciencies
that allowed invoices to be paid without receiv-ing
supporting documentation for the order or a
confirmation the product had been received.
In a management letter, the Office of the State
Auditor made several recommendations regarding pur-chasing
and payment for products. Recommendations
included that all payments related to the purchase of
goods should require evidence of receipts. The state
auditor also recommended personnel authorizing pay-ments
should obtain a thorough understanding of con-tractual
services within their departments to minimize
the risk of paying illegitimate vendors for legitimate
products. In addition, the state auditor recommended
UNC Hospitals and UNC- Chapel Hill initiate legal action
to recover payments made to Copy Center for toner that
was never received nor ordered.
In response to the management letter documenting
the questionable payments, the Chancellor of the
University of North Carolina at Chapel Hill asserted that
his office had issued a memorandum to staff that
addressed the internal control issues raised by the inves-tigation
and that the incident in question had been
referred to the UNC Police for criminal investigation.
North Carolina A& T State University ( NC A& T) From
February 2001 through February 2002, the Office of the
State Auditor received allegations concerning possible
violations of state and university regulations and poli-cies.
The complaints included inappropriate use of state
vehicles by several staff members; performance of sec-ondary
job duties during the regular workday, and; pos-sible
violations of bidding procedures.
An investigation by the Office of the State Auditor sub-stantiated
the allegation that the NC A& T public safety
director commuted in his permanently assigned state
vehicle from Charlotte to Greensboro on a daily basis
without proper approval. The public safety director
admitted he had commuted from his home in Charlotte
to the university in Greensboro for five months after he
was hired. Based on the director’s estimation that the
mileage from his home to the university was 72 miles
each way, the commuting use of the vehicle for five
months ( based on five days a week, four weeks a month)
totaled 14,400 miles. The actual use of the vehicle for
commuting could not be determined due to the lack of
daily or trip mileage logs for the vehicle in question.
The vice chancellor of business and finance for the
university said he had authorized the public safety
director’s use of a state vehicle for commuting for
what he believed would be a temporary amount of
time, believing the director would be moving to the
Greensboro area.
Investigators concluded the director should have
obtained approval from the Division of Motor Fleet
Management to commute in a state vehicle as well as
pay the $ 3 daily commuting fee required by state regu-lations.
Auditors also noted that confusion over vehicle use
as a whole existed at the university. Specifically, auditors
noted inadequate mileage reporting across the board
with regards to state vehicles. Auditors determined most
employees at the university were simply recording a
monthly mileage total with no breakdown of actual trips
or use when mileage was incurred. Such mileage report-ing
did not meet state regulations.
The investigation did not substantiate the allegation
that a tenured professor was violating the university’s
teaching policies by teaching courses at another college.
However, auditors did note regular violations of the uni-versity
policy requiring employees to complete annual
“ Conflict of Interest” and “ Notice of Intent to Engage
in External Professional Activity for Pay” forms.
The investigation did not substantiate the allegation
33
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
that the physical plant failed to follow appropriate com-petitive
pricing policies for a particular vendor. However,
during the investigation auditors identified an instance
where a contractor was paid twice for the same services.
This double payment was due to an ability to circum-vent
an internal control procedure designed to eliminate
payment of duplicate invoice numbers. Accounts
Payable personnel negated the internal control by using
different formats for invoice numbers.
In a management letter, the state auditor recom-mended
that university management review and reiter-ate
the importance of adherence to correct motor fleet
regulations by all employees; review relevant employ-ment
policies and reiterate to employees the necessity
of proper reporting and authorization of all employ-ment
outside the university, and; review internal control
policies and create a standard invoice number format to
prevent more duplicate payments. The Office of the
State Auditor also recommended the university finance
office review a sample of vendor payments to identify
other duplicate payment errors and seek reimbursement
of the $ 6,334 overpayment to the vendor.
In response to the Office of the State Auditor’s man-agement
letter, the UNC A& T Chancellor stated they
concurred with findings and recommendations regard-ing
vehicle use, employee conflict of interest forms and
vendor contracts and bidding procedures. The univer-sity’s
comptroller’s office planned to follow up the audi-tors’
recommendation to seek reimbursement of the
vendor overpayment.
Project Challenge North Carolina, Inc. A caller to the
state auditor’s hotline alleged possible inappropriate use
of grant funds by employees at Project Challenge. In
addition, the allegations included violations of policy
and improper use of organization vehicles. Auditors
34
FRAUD, WASTE, AND ABUSE ( HOTLINE)
found the executive director and four other employees
used the organization’s van for a trip to Florida. The
executive director said the four- day diving trip to the
Florida Keys was a team- building event that was sched-uled
to occur at the end of the group’s attendance at a
conference in Pinehurst. The conference was cancelled
due to a hurricane, but the trip to Florida continued as
planned. Mileage logs for the van indicated the Florida
trip covered 2,466 miles.
In addition, one of the organization employees drove
an organization vehicle to attend the executive director’s
daughter’s wedding in the spring of 1999. The executive
director stated he hired the employee in question to per-form
at the wedding ceremony but did not authorize
use of the vehicle to attend the function.
The executive director said Project Challenge opera-tional
policies and procedures allow for personal and
third- party use of agency vehicles. In addition, Project
Challenge policies allowed for personal use of organi-zation
equipment and property, including telephones,
cellular telephones, calling cards, gas cards, vehicles or
other equipment, with permission of supervisors.
Auditors found that the vehicle in question was pur-chased
in part with funds provided by the Governor’s
Crime Commission and Office of Juvenile Justice. Crime
Commission officials said personal or third- party use of
any property purchased with Governor’s Crime
Commission grant funds is not acceptable, regardless of
the organization’s own policies.
In a management letter to Project Challenge’s board,
the Office of the State Auditor recommended the board
revise the organization’s policies regarding personal and
third- party use of property, equipment and vehicles in
order to comply with grant requirements. In addition, the
Office of the State Auditor recommended the Governor’s
Crime Commission consult with legal counsel to deter-
35
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
mine if they should seek reimbursement of $ 764.46 ( 2,466
miles x $ 0.31 federal reimbursement rate as of October
1999) for the use of the vehicle during the trip to Florida.
Department of Transportation— Resident Engineer’s
Office A caller to the state auditor’s hotline alleged that
the Department of Transportation ( DOT) resident engi-neer’s
office in Matthews contracted with the spouse and
niece of the processing assistant assigned to the office,
thereby creating a conflict of interest.
Following a review of DOT records and interviews
with DOT employees and others, auditors concluded
that a conflict of interest did occur when an employee
obtained services from her spouse’s company. The pro-cessing
assistant at the resident engineer��s office was
responsible for contacting heating and air conditioning
companies in the area to obtain bids for their new office
building. The processing assistant stated she mailed
requests for bids to four local heating and air condition-ing
companies as well as to her husband’s company.
According to the assistant, she asked the Division 10 oper-ations
engineer if her husband could bid on the job and
got approval before sending him a request for bid.
The processing assistant’s husband was the only ven-dor
to attend the pre- bid conference and the only ven-dor
to submit a bid. Consequently, the employee’s
husband was awarded the job. The processing assistant
said both the resident engineer and the Division 10 engi-neer
were aware her husband’s company was awarded
the contract. Auditors determined that from 1994
through June 23, 2002, the processing assistant’s hus-band’s
heating and air conditioning company was paid
a total of $ 23,413 for services provided at the DOT build-ing
in Matthews.
In addition, auditors determined the processing assis-tant
was the contract administrator for her niece’s jani-torial
service contract. In May 2001, the current janitorial
contract was expiring and the Division 10 office in
Albemarle prepared a bid package to solicit bids for the
new project. The processing assistant believed it was
acceptable for her niece to submit a bid for the contract
since it had been approved for her husband to provide
services for the office. The employee’s niece submitted
the lowest of the three bids submitted for the contract
and subsequently was awarded the contract. From May
2001 through June 2002, the niece’s janitorial company
received $ 26,024 from DOT.
The processing assistant submitted a secondary
employment request to work for her niece’s janitorial
company to clean the DOT building. The Division 10
engineer denied her and removed the processing assis-tant
as the contract administrator once he learned of her
familial relationship to the contractor.
In a special review report, the Office of the State
Auditor recommended DOT implement procedures that
formally address the conflict of interest issues by iden-tifying
relationships among employees that may be
viewed by the public as conflicting with public service,
and communicating the organization’s process for
removing employees from any involvement with related
vendors.
Central Piedmont Community College During the Office
of the State Auditor’s annual financial audit of Central
Piedmont Community College ( CPCC), the auditors
noted that on August 1, 2000, CPCC paid a $ 93,600 real
estate broker’s commission on the purchase of 1.98 acres
from Central Piedmont Community College Founda-tion,
Inc. ( Foundation). Following the financial auditors’
collection of preliminary documentation surrounding
this transaction, the investigative audits division con-ducted
an investigation into this matter.
The investigation concluded that CPCC manage-ment,
in purchasing real estate from the foundation with
funds provided by the county, paid $ 260,548 more than
the price established by an option to purchase and paid
a $ 93,600 real estate commission when they already held
an option to purchase the property.
36
FRAUD, WASTE, AND ABUSE ( HOTLINE)
In 1994, CPCC acquired an option to purchase approx-imately
1.98 acres on Independence Boulevard in
Charlotte. Two years later, the foundation purchased the
property for $ 1,872,000 and leased it to CPCC for
$ 18,502.05 per month for a 10- year lease term. That same
year, CPCC and the foundation entered into an option-to-
purchase agreement for the property for the amount
of any outstanding loans secured by the property.
In August 2002, CPCC purchased the property from
the foundation for $ 1,872,000. The corresponding closing
and disbursement statement shows that CPCC paid a
$ 93,600 broker’s commission at the closing even though
CPCC already had an option to purchase from the foun-dation
prior to hiring a realtor. In addition, auditors noted
the purchase price was $ 260,548.25 more than the price
established by the option- to- purchase documents.
The CPCC executive vice president involved in the
transactions stated she prepared a list of properties
CPCC would like to acquire in the Elizabeth Street area
and gave the list to a realtor. The 1.98- acre plot was
included on the list in error because the vice president
had forgotten about the option to purchase. She
acknowledged that a realtor had not been needed for the
purchase and that CPCC had agreed to pay the
Foundation the purchase price of the land as opposed
to the amount of the outstanding loan ($ 1,611,451.75).
The attorney who represented the county in the real
estate transaction stated he had not been told of the
option- to- purchase agreement and that CPCC had orig-inally
been asked by the foundation to pay the market
value of the land ($ 2,200,000) but had refused. The pres-ident
of the real estate company that received the trans-action
commission, who is also a foundation board
member, said he had not been aware of the option to
purchase or the property would have been removed from
his company’s list of properties to acquire for CPCC.
The CPPC president stated he had forgotten the option
until auditors brought it to his attention. He also said that
the foundation intended on reimbursing the county
$ 260,548.25 as well as any interest that would have accrued
on the funds since the transaction. In addition, the
Foundation intended on reimbursing the county $ 80,753
for the commission and the realtor agreed to reimburse
the remaining $ 13,027 of the commission.
In a special review report, the Office of the State
Auditor recommended CPCC assure that the founda-tion
would reimburse the county $ 260,548.25 for the
excess purchase price and that the county be reimbursed
the $ 93,600 for the real estate commission. In addition,
the Office of the State Auditor recommended CPCC
review its procedures and practices on real estate pur-chases
to assure it is fully aware of the interest it holds
in properties and that real estate brokers are used only
when needed.
In a response to the special review report issued by
the Office of the State Auditor, the president of CPCC
explained that they had already implemented the rec-ommendation
and had reimbursed the County in full
for the additional cost to purchase and the real estate
commission.
Bladen County Partnership for Children, Inc. A call to the
state auditor’s hotline prompted a special review of an
individual allegedly selling playground equipment that
had already been purchased by the Bladen County Smart
Start Partnership. During the investigation that included
examination of Bladen County Partnership’s documents
and records, inspection of the Bladen Partnership’s play-ground
installations, interviews with employees of the
Bladen Partnership and with employees of the North
Carolina Partnership for Children, auditors concluded
that the executive director of the Bladen Partnership
authorized payments totaling $ 54,488.17 for playground
equipment that could not be located.
From June 21, 2000, to May 16, 2001, the Bladen
County Partnership was engaged in a project to improve
playgrounds at daycare centers in Bladen County. During
this time the Partnership purchased $ 318,568.03 worth of
37
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
playground equipment from various businesses, includ-ing
DayCare Specialties. During review, auditors noted
that a number of invoices from DayCare Specialties did
not provide information about the location of playground
equipment installations or specific equipment installed as
most invoices from other businesses did. Regardless, the
Partnership issued checks to DayCare Specialties, in some
instances payable directly to the owner of the company,
for these installations. Of the amount expended for play-ground
equipment, DayCare Specialties was paid
$ 178,222.52. Of this amount, auditors were unable to
locate $ 54,488.17 of playground equipment purchases
from DayCare Specialties.
The owner of DayCare Specialties acknowledged that
he received payments for work that was never com-pleted.
He said many of his invoices were based on plans
to install playground equipment at specific locations but
were never installed. The executive director of the
Bladen Partnership authorized cash disbursements to all
vendors, including DayCare Specialties, via her signa-ture
on checks. Although the executive director said that
a procedure existed to document the delivery and satis-factory
installation of playground equipment before a
check was issued, auditors found no evidence that this
procedure was followed.
The auditors also noted that several payments for
installation of playground equipment appeared exces-sive.
For example, DayCare Specialties was paid $ 7,847
to install a piece of Little Tykes playground equipment
that cost $ 3,858. For five installations of equipment cost-ing
$ 21,162.67, the Bladen Partnership paid DayCare
Specialties a total of $ 38,971. The ratio of installation
costs to acquisition costs for these items ranged from
129 percent to 284 percent. Invoices from another ven-dor
that provides the same type of services indicated
installation charges of 20 percent to 40 percent of the
cost of equipment.
The Bladen Partnership had no contract with
DayCare Specialties that could have included specific
rates for installation of various types of playground
equipment. In addition, auditors found no evidence that
the Partnership utilized a competitive bidding process
before employing DayCare Specialties.
During the review, auditors also noted that the Bladen
Partnership paid DayCare Specialties for the cost and
installation of playground equipment at an undesignated
childcare facility in Bladen County. One year later,
DayCare Specialties charged a childcare provider for the
same playground equipment. In February 2001, the
Bladen Partnership issued a $ 17,448 check to DayCare
Specialties for two pieces of playground equipment. On
the invoices for this equipment, no specific installation
location was assigned. During auditors’ inspection of
daycare facilities in Bladen County, they confirmed that
the two pieces of equipment had been installed at two
different childcare provider locations. One of the
providers paid DayCare Specialties $ 2,895 for one piece
of equipment, thus resulting in the vendor selling the
same piece of equipment twice.
In addition to the above findings, auditors also deter-mined
that the executive director authorized payments
totaling $ 10,500 to the owner of DayCare Specialties for
a transportation study that was never presented to the
board of directors or used to provide services the chil-dren
of Bladen County. The executive director said the
study was to determine the feasibility of providing trans-portation
for children to daycare centers. Auditors found
no evidence the Partnership obtained competitive bids
or executed a written contract for the project. The exec-utive
director was the only Partnership employee that
remembered the transportation study actually being
delivered. When asked by auditors to provide a copy of
the study, the owner of DayCare Specialties said his
copies were lost when his computer crashed and he had
not retained any paper copies. In addition, he stated the
executive director’s copies of the report were lost when
they had been in her car at the time of an automobile
accident.
38
FRAUD, WASTE, AND ABUSE ( HOTLINE)
The executive director did provide auditors with a
copy of the study near the end of the special review.
However, the report was never presented to the Bladen
Partnership’s board or used for any purpose related to
the Smart Start initiative.
During the investigation the auditors noted that pay-ments
totaling $ 188,722.52 to DayCare Specialties were
not reported to the Internal Revenue Service for 2000
and incorrectly reported for 2001 in violation of federal
regulations.
In a special review report the Office of the State
Auditor recommended that the North Carolina Part-nership
for Children seek reimbursement of $ 54,488.17
from the Bladen Partnership for the playground equip-ment
that could not be located. Additionally, the report
recommended the board consult with legal counsel
concerning DayCare Specialties incomplete perform-ance
of services and that the Bladen Partnership imple-ment
procedures to ensure that checks are not issued
without verification that a product has been received
or a service has been performed.
Additionally, the Office of the State Auditor recom-mended
the North Carolina Partnership for Children
analyze the installation costs and compare the installa-tion
costs to the costs charged other partnerships and
seek reimbursement for any excess from the Bladen
Partnership. The report also recommended the Bladen
Partnership’s board of directors ensure that future proj-ects
include written contracts outlining specific rates of
compensation for contracted services and include com-petitive
bidding procedures to ensure that compensation
does not exceed reasonable and customary rates. In the
special review report the Office of the State Auditor also
recommended the North Carolina Partnership for
Children seek an additional reimbursement of the
$ 10,500 for the transportation study from the Bladen
Partnership. The reports final recommendation was that
the Bladen Partnership’s board implement procedures
to ensure compliance with Internal Revenue Code
reporting requirements.
39
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
In their response, Bladen County Partnership for
Children, Inc. stated that legal services were being
retained as recommended to assist in pursuing resolu-tion
to the issues with DayCare Specialties regarding
incomplete performance of services, excessive payments
made to the vendor and the unauthorized sale of play-ground
equipment to a childcare provider. The Bladen
County Partnership board also said it would improve
oversight of the Bladen Partnership.
In the North Carolina Partnership for Children’s
response to the special review report, the executive direc-tor
indicated they would follow the Office of the State
Auditor’s recommendation to seek reimbursement from
the Bladen Partnership for any Smart Start funds
expended for playground equipment that could not be
located, as well as any Smart Start funds expended for
installation costs that exceeded reasonable and custom-ary
rates.
Pender County Partnership for Children, Inc. In July 2002,
the Pender County Partnership’s ( PCPC) board of direc-tors
requested the Office of the State Auditor conduct an
investigation into concerns that the executive director mis-handled
her office for personal profit. The board of direc-tor’s
original allegations included the disbursement of
partnership funds for unapproved program activities, vio-lation
of vendor contract policies and purchase of items
for personal use. Additional issues for investigation arose
during the course of the special review.
During the course of the investigation, which
included interviews with current and former PCPC
employees, interviews with PCPC board members,
interviews with individuals external to PCPC and exam-ination
of relevant documents, auditors noted a variety
of findings regarding the Pender Partnership’s financial
transactions and managerial actions. Auditors noted the
former executive director authorized expenditures of
$ 30,674.46 for activities not approved by the North
Carolina Partnership for Children, Inc. ( NCPC). NCPC
requires local partnerships to submit a proposal of all
planned service activities to be approved for funding.
The approved activities and programs are included in
the annual contract between a partnership and NCPC.
These contracts specify that any changes in the scope of
services provided by a local partnership must be pre-sented
to NCPC in writing and if agreed upon, will be
noted as an amendment to the original contract.
However, the former executive director of the Pender
Partnership authorized employees to charge costs to two
programs that had not been approved or included in the
contract between PCPC and NCPC. The former exec-utive
director did not include these programs and activ-ities
in the form of an amendment to the original
contract, thereby resulting in $ 30,674.46 of unallowable
funds, which had to be repaid to NCPC.
Auditors also discovered that the former executive
director obtained $ 30,714.64 in funds on behalf of PCPC
from Pender County without authorization of the
board, which was a violation in their bylaws. The for-mer
executive director obtained the funds to repay
NCPC for the unallowable expenditures. The former
executive director did not notify the board that she had
obtained such funds from the county subsequent to the
transaction.
During a review of check registers and invoices for pur-chases
made during fiscal years ending June 30, 2001, and
June 30, 2002, auditors identified $ 41,299.96 in question-able
expenditures made by the Partnership. Items pur-chased
included excessive amounts of food/ candy items
for staff and board meetings, flowers for staff and board
members and excessive amounts of promotional items.
Review of the documents also revealed that PCPC
paid $ 53,657.43 to vendors without adhering to com-petitive
bidding policies and procedures. PCPC also
obtained services from the former executive director’s
niece and husband, thereby creating a conflict of inter-est.
In addition, auditors determined that PCPC spent
$ 67,199.93 on local Headstart and kindergarten pro-
40
FRAUD, WASTE, AND ABUSE ( HOTLINE)
grams, neither of which were approved program
providers for the Partnership.
The investigation also noted that PCPC incurred in
$ 13,594.90 in questionable travel expense reimburse-ments
during the fiscal years ended June 30, 2001, and
June 30, 2002. The former executive director’s requests
for reimbursement for travel often lacked adequate detail
for locations and reasons for travel. In addition, the
mileage submitted by the former executive director dif-fered
significantly from the map mileage for those trips.
The auditors also noted that the former executive
director allowed a program provider to keep unex-pended
funds amounting to $ 15,891.27 that should have
been reverted to the Partnership and ultimately reverted
to the North Carolina Partnership for Children.
According to current Partnership staff, the former exec-utive
director told them to inform the program, which
was run by a Partnership board member, to keep the
money and to amend their annual budget so that the
unexpended funds were not shown. In addition the for-mer
executive director authorized two Partnership
employees to use $ 26,473.51 in salaried time to perform
assessments of unauthorized kindergarten programs.
According to the two employees instructed to perform
the assessments, the former executive director told them
they “ could find another job” if they did not provide the
assessments.
The Office of the State Auditor recommended that
PCPC revise their existing policies to provide necessary
internal controls to ensure that unapproved service codes
are not charged, pursuant to contract terms. The report
also recommended the board of directors develop an
action plan to familiarize themselves with PCPC’s poli-cies
and procedures to prevent board members from
authorizing expenditures or signing checks for unap-proved
activities.
With regards to wasteful or questionable expenditures,
the report recommended that PCPC management and
board revise their accounting policies and procedures to
ensure adequate control over payments to vendors,
including limiting purchases to items that are identifiable
as necessary for the performance of employee duties or
advancement of the Smart Start initiative. In addition,
auditors recommended the board reiterate and enforce
the requirements for quotes and/ or competitive bidding
for service contracts and purchases over threshold
amounts. To avoid even the appearance of a conflict of
impropriety, auditors recommended PCPC refrain from
hiring relatives of board and staff members.
Auditors recommended that all PCPC employees
adhere to travel reimbursement policies and that man-agement
review all travel reimbursement requests for
required documentation as well as evaluate the neces-sity
for mileage incurred.
The Office of the State Auditor advised NCPC seek
reimbursement of the $ 15,891.27 in unexpended funds
that should have been reverted to them and the
$ 26,473.51 in unallowable costs for the kindergarten
assessments by PCPC employees.
In a response to the special review report, PCPC’s
board agreed with the Office of the State Auditor’s find-ings
and recommendations and would seek reimburse-ment
of the $ 15,891.27 in unexpended funds and work
with NCPC to resolve the $ 26,473.51 in unallowable
salary costs.
Employment Security Commission An investigation was
begun when the Office of the State Auditor received a
complaint that the director of public information of the
North Carolina Employment Security Commission
( ESC) was consistently absent from the office or late
arriving to work without deducting leave from his offi-cial
timesheets. During the investigation auditors inter-viewed
several ESC employees who had maintained
their own diaries of the dates, times and excuses given
by the public information director when absent.
Auditors’ comparison of those diaries to the public infor-mation
director’s official timesheets for January 1, 2002,
41
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
through October 31, 2002, revealed he was absent and/ or
worked less than 8 hours 107 days of the 212 work days
reported as completed on the timesheets. Interviews
with employees indicated the director of public infor-mation
claimed to be working from home even though
he denied those employees the same privilege when
requested.
ESC had previously received a similar complaint that
had been internally investigated. The director of public
information’s supervisors had not felt the allegation was
adequately substantiated and had made no apparent
effort to follow up on the director’s absences.
During the investigation employees told auditors that
the public information director purchased equipment
that was not used, and in some cases never seen by staff.
Purchases such as a DVD- RAM drive, software and a dig-ital
video camera were not utilized by staff other than
the director and viewed as unnecessary by the auditors.
In addition, these purchases were made without the
director’s adherence to purchasing policies regarding req-uisitions.
Auditors also noted the director of public informa-tion
spent $ 40,123.05 on computer equipment and
repairs without the appropriate approvals. The ESC
Financial Management Handbook states that all com-puter
and software purchases are to be routed through
the Information Section for their review. The director of
public information failed to adhere to this policy for a
number of repairs, upgrades and purchases.
The investigation also revealed the director of public
information made $ 866.58 in unapproved purchases with
his personal credit card or cash and was reimbursed by
( Cameras): State Auditor Ralph Campbell takes questions from reporters during a news conference to release the performance audit on North
Carolina’s juvenile justice facilities.
42
FRAUD, WASTE, AND ABUSE ( HOTLINE)
ESC although the some of the purchases were shipped
to his home in the name of his personal business. These
purchases were made without adherence to the agency’s
required purchase order process, with the exception of
one item that fit into the allowable emergency purchase
requirement. Examples of non- emergency items pur-chased
include software, camera bags, CD- Rom
envelopes and a computer mouse. Auditors questioned
the validity of reimbursement for $ 610.15 in purchases
made directly by the director of public information.
In a special review report, auditors recommended the
public information director accurately record leave as
earned and used and that he maintain scheduled work-ing
hours and notify his supervisor when he is absent or
tardy. In addition, auditors recommended that if ESC
formally allows flexible work schedules and/ or telecom-muting,
policies be developed in order to assure the
needs of the agency and public are met and that all
employees are treated equitably.
Regarding purchasing issues, the state auditor rec-ommended
the public information director adhere to
purchasing policies regarding approvals and shipment
location and that all purchases for automation equip-ment
be reviewed by the Information Systems section.
The Employment Security Commission, in its
response to the special review report, stated the allega-tions
had previously been investigated to their satisfaction
and concluded the director was operating within agency
standards. However, the director of public information
did reimburse ESC for $ 119.99 for software purchased on
his personal credit card and ESC has taken steps to avoid
purchases being sent to an employee’s home.
In a special note from the state auditor addressing the
ESC response, the Office of the State Auditor stood by
its findings and recommendations made in the special
review report.
43
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Law Enforcement Support Services— Department of Crime
Control and Public Safety A complaint was received
through the state auditor’s hotline that employees in the
Law Enforcement Support Services ( LESS) within the
Department of Crime Control and Public Safety were
filling up their personal vehicles with gasoline from state
pumps. The investigation did not substantiate the initial
allegation. However, during the course of the investiga-tion,
auditors noted that LESS employees were com-muting
in undercover vehicles as well as identifiable
state- owned vehicles without proper authorization, pay-ment
of commuter fees or maintenance of adequate
mileage logs.
All five of the current and former LESS employees
interviewed stated they frequently drove state- owned
vehicles to and from their homes during the workweek
and to lunch on the days they commuted. All the
employees in question can be required to travel routinely
for job duties and in some cases the travel destination is
closer to the employee’s home than to the LESS office
in Raleigh. In those circumstances, it is understandable
for the employees to drive the state owned vehicle home
the night before travel is to occur. However, all employ-ees
interviewed stated they also commuted in the vehi-cles
on days when they were working in the office.
According to the director and employees of LESS,
this use of the state- owned vehicles was to keep the vehi-cles
“ road worthy” for loan to the various law enforce-ment
agencies. In addition, auditors discovered the direc-tor
of LESS commutes daily in a Ford Excursion that
was purchased under a contract with the Office for
Domestic Preparedness in the U. S. Department of
Homeland Security.
Motor Fleet Management ( MFM) regulations require
persons approved for commuting in state- owned vehi-cles
to pay a $ 3 daily fee for 20 days of each month.
In a management letter following the investigation,
the Office of the State Auditor recommended that LESS
employees cease commuting in state- owned vehicles
unless such use has been appropriately authorized by the
Department of Administration. In addition, the auditors
said employees should pay the required commuting fee.
In response to the management letter, the Depart-ment
of Crime Control and Public Safety agreed that to
avoid the appearance of impropriety, all LESS employ-ees
had been instructed to cease commuting in state-owned
vehicles. The department further instructed LESS
to maintain mileage logs and keep detailed records of
vehicle usage. The department also began discussions
with the Department of Administration to resolve any
issues with regards to the LESS Director commuting in
his permanently assigned vehicle and not reimbursing
the state for commuting expenses.
44
CONTACT INFORMATION C
Ralph Campbell, Jr., CFE,
State Auditor
Ralph_ Campbell@ ncauditor. net
(    )    -    
George H. Walls, Jr., Chief Deputy
George_ Walls@ ncauditor. net
(    )    -    
Jeff Henderson, CPA, CISA, Deputy
Jeff_ Henderson@ ncauditor. net
(    )    -    
Wesley Ray, CPA, Deputy
Wesley_ Ray@ ncauditor. net
(    )    -    
Vicky Young, Deputy
Vicky_ Young@ ncauditor. net
(    )    -    
Lenny Superville, Ph. D.
Director, Management
Information Systems
Lenny_ Superville@ ncauditor. net
(    )    -    
Cindy Gilliam, Controller
Cindy_ Gilliam@ ncauditor. net
(    )    -    
Martin Vernon, CPA, CISA,
Director, Information Systems
Audit Division
Martin_ Vernon@ ncauditor. net
(    )    -    
Rob Hillman, JD, CPA,
General Counsel
Rob_ Hillman@ ncauditor. net
(    )    -    
Glenda Shields, Personnel Officer
Glenda_ Shields@ ncauditor. net
(    )    -    
Dennis E. Patterson, Coorindator
of Audit Publications
Dennis_ Patterson@ ncauditor. net
(    )    -    
SENIOR MANAGEMENT TEAM
opies of reports issued by the Office of the State
Auditor may be requested through the email link on the
web site at www. ncauditor. net or by calling the main
phone number listed at right. Other inquiries, com-ments,
and suggestions may be made by contacting the
main office or one of the staff members listed below.
N. C. Office of the State Auditor
 South Salisbury Street
     Mail Service Center
Raleigh, NC      -    
Main Phone Number: (    ⁾    -    
Hotline Number: (    )    -    
Fax Number: (    )    -    
Janet Hayes, CPM
Specialty: Performance Audits
Janet_ Hayes@ ncauditor. net
(    )    -    
Lee Linker, CPA
Specialty: CAFR
Lee_ Linker@ ncauditor. net
(    )   ��� -    
David Nance, CPA
Specialty: Non- Governmental
Smart Starts
David_ Nance@ ncauditor. net
(    )    -    
Dale Place, CPA, CFE
Specialty: Fraud, Waste, and Abuse
Dale Place@ ncauditor. net
(    )    -    
Faye Steele, CPA
Specialty: Clerks of Court
Fayetteville Branch
Wilmington Branch
Greenville Branch
Elizabeth City Branch
Faye_ Steele@ ncauditor. net
(    )    -    
Stan Wesner, CPA
Specialty: Single Audit,
Health Issues
Stan_ Wesner@ ncauditor. net
(    )    -    
Linda Hollar, CPA
Specialty: Universities
Linda_ Hollar@ ncauditor. net
(    )    -    
AUDIT MANAGEMENT TEAM
North Carolina
Office of the State Auditor
 South Salisbury Street
     Mail Service Center
Raleigh, NC      -    
Main Phone Number: (    )    -    
Hotline Number: (    )    -    
Fax Number: (    )    -    

For the Fiscal Year Ended June 30, 2003
Ralph Campbell, Jr. North Carolina State Auditor
Accountability, Integrity & Reliability
ANNUAL REPORT OF THE
NORTH CAROLINA
OFFICE OF THE STATE AUDITOR
Cover photo: Courtesy of Michael Zirkle Photography
G
message from the state auditor
1
overnment agencies and institutions annually spend billions of
dollars of public money to provide services for North Carolina’s citizens.
To ensure that these funds are wisely spent and accounted for, the Office
of the State Auditor provides audit and advisory services to State- sup-ported
organizations. This annual report provides an overview of the
Office of the State Auditor and summarizes its activities for the year
ended June   ,     . I hope you find the report informative and useful.
I have proudly served the State of North Carolina as state auditor
since January     . My staff and I take our responsibility to the citizens
of North Carolina very seriously and strive to professionally perform
our duties. We continually seek ways to improve the quality of our
work while successfully adapting to the ever- changing business envi-ronment.
We pledge to serve you to the very best of our ability.
Ralph Campbell, Jr.
North Carolina State Auditor
The 1868 State
Constitution
created the Office
of the State
Auditor.
In 1782, the
General Assembly
appointed Richard
Caswell as North
Carolina’s first
Comptroller.
T HISTORY
he term auditor in North Carolina State government
dates back to the original colonial constitution, adopted
on March  ,     , which authorized twelve auditor posi-tions.
However, no evidence exists that the positions ever
functioned in their intended capacity of keeping rent rolls
and other accounts. As the colony grew, the General
Assembly and comptrollers of the King of England
appointed boards of auditors to serve in various com-munities
to handle matters as des-ignated
by the English monarchy.
In     , the General Assembly
appointed Richard Caswell as North
Carolina’s first comptroller. His
duties were to direct the mode of
stating, checking, and controlling all
public accounts as well as to keep
these accounts for inspection by the
General Assembly. In addition, ten
boards of auditors were to be
located in various parts of the state.
This system remained in place
until     when the General
Assembly established the Office of
Auditor of Public Accounts. That
office was abolished in     .
The     State Constitution cre-ated
the Office of the State Auditor
( Table  ). The state constitution states that the people
should elect the state auditor to “ superintend the fiscal
affairs of the state, examine and settle accounts of per-sons
indebted to the state, liquidate claims by persons
against the state, and draw warrants on the state treasurer
for moneys to be paid out of the treasury.”
In     , the system of county taxes on property, polls,
and income was established, with the local sheriff act-ing
as the tax collector. The state auditor prepared the
forms for listing taxes and gave them to each sheriff. The
Auditor was to report to the state treasurer the amounts
due to each fund and whether any sheriff defaulted his
account. The Revenue Act of     relieved the auditor
of his local tax duties.
The Legislature strengthened the power of the state
auditor in     by giving the office
the power to examine, audit, and
adjust accounts. However, it also
made the auditor responsible for
disbursements and the overall
accounting system. This dual role
presented the auditor substantive
independence issues in carrying
out the assigned duties. In     the
General Assembly separated the
duties by transferring the purely
accounting functions to a new
department in the executive
branch. This change resulted in
the state auditor being in an inde-pendent
position to review and
comment on the operational and
financial affairs of North Carolina
State Government.
The state auditor has continued to acquire increased
responsibilities. The Performance Audit Section was
created in     . In     , the General Statutes pertaining to
the state auditor ( G. S. §    -   ) were rewritten to provide
a more comprehensive view of the state auditor’s duties.
The Fraud, Waste, and Abuse Section was created in    
OVERVIEW OF THE OFFICE OF THE STATE AUDITOR
3
Table 1.
STATE AUDITORS SINCE 1868
State Auditors Term
Henderson Adams 1868– 1873
John Reilly 1873– 1877
Samuel L. Love 1877– 1881
William P. Roberts 1881– 1889
George W. Sandlin 1889– 1893
Robert M. Furman 1893– 1897
Hal W. Ayer 1897– 1901
Benjamin F. Dixon 1901– 1910
Benjamin F. Dixon, Jr. 1910– 1911
William P. Wood 1911– 1921
Baxter Durham 1921– 1937
George Ross Pou 1937– 1947
Henry L. Bridges 1947– 1981
Edward Renfrow 1981– 1993
Ralph Campbell, Jr. 1993– present
Source: North Carolina Manual
and was given subpoena power by the General Assembly.
The list of entities subject to audit also has grown. For
example, the state auditor was required to perform finan-cial
and compliance audits of the North Carolina
Partnership for Children and the local Smart Start part-nerships
when that program was established in     .
In November     , the Office of the State Auditor
moved its main location from the Legislative Office
Building to the newly- renovated Old Revenue Building.
This move allowed for a more modern work environ-ment,
training facilities with audio- visual and on- line
capabilities, increased conference room space, and
expanded storage facilities.
MISSION, COMMITMENT, AND GOALS
The mission of the North Carolina Office of the State
Auditor is to independently evaluate the state’s fiscal
accountability and public program performance for
North Carolina’s citizens and others. The office strives to
assure that state govern-ment
is executing its
management responsi-bilities
in compliance
with applicable laws,
rules, regulations, and
policies. The office also
evaluates whether suffi-cient
management con-trols
and policies exist to
enable state agencies to
most efficiently and effectively use public resources.
The professional staff, located in Raleigh and nine
branch locations ( Figure 1), is committed to producing
thorough, independent audits and examinations to
develop useful and practical recommendations to
improve State governmental services. The office strives
to present fair and independent findings and recom-mendations
as well as promote cooperative efforts with
4
OVERVIEW
SENIOR MANAGEMENT TEAM ( left to right): Wesley Ray, Lenny Superville, Lillian Whitaker, Bobby Matthews, Shelia Thompson, Rob Hillman, State
Auditor Ralph Campbell, Martin Vernon, Wanda Lairson, Vicky Young, Cindy Gilliam, George Walls, Dennis Patterson. Not shown: Glenda Shields
Chief Deputy State Auditor
George Walls
the agencies and institutions under its oversight.
The key goals of the Office of the State Auditor are to:
n report the accountability of state government to the
citizens and other customers
n provide responsive professional support to all client
agencies as well as to provide responsive, professional
and administrative support to employees to enable
them to best complete their responsibilities
n conduct timely, cost- effective audits in accordance
with applicable professional standards
n ensure staff are fully qualified to perform required tasks
n implement new initiatives wherever possible to be more
proactive in strengthening governmental management
STATUTORY AUTHORITY
General Statutes §    -   .  -   .   outline the duties and
responsibilities of the state auditor. These statutes man-date
that all state agencies and entities partially or entirely
supported by public funds are subject to audit by the state
auditor. These audits independently evaluate public pro-gram
performance for the General Assembly, governor,
executive departments and agencies, governing bodies,
and the general public. Specifically, the state auditor inde-pendently
examines and makes findings of fact on
whether State agencies:
n established adequate operating and administrative
procedures, reporting systems, and elements of man-agement
control
n provided financial and other reports that disclose fairly,
consistently, fully, and promptly all information nec-essary
to demonstrate program performance
n collected, deposited, and properly accounted for all
revenues and receipts arising from activities
n conducted programs and expended funds in an effi-cient
and economical manner as well as in compli-ance
with applicable laws and regulations
n determined that programs effectively served the
legislative intent
General Statutes also mandate that specific audits such as
the largest audit, the State’s Comprehensive Annual Financial
Report ( CAFR), be conducted. The law mandates that all
audits be conducted in accordance with appropriate pro-fessional
standards and that the state auditor be inde-pendent
of the organizations audited.
ORGANIZATION
The state auditor is a constitutional officer elected
statewide every four years. The state auditor is a member
of the Council of State which also includes the governor,
lieutenant governor, secretary of state, state treasurer,
superintendent of public instruction, attorney general,
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
5
Morganton
Winston- Salem
Greensboro Raleigh
Greenville
Wilmington
Fayetteville
Charlotte
Elizabeth City
Asheville
n
n
n
n
n
n
n
n
n
n
Figure 1.
OFFICE OF THE STATE AUDITOR MAIN OFFICE AND BRANCH LOCATIONS
commissioner of agriculture, commissioner of labor,
and commissioner of insurance.
The Office of the State Auditor’s senior management
team, which includes the state auditor, chief deputy state
auditor, general counsel, deputy state auditors, personnel
officer, director of information resource management,
and the accounting manager, is made up of professionals
with specialties in management, law, personnel, technol-ogy,
and accounting. This group oversees all the admin-istrative,
audit, and investigative functions of the office.
The office’s administrative functions include account-ing,
clerical support, information resource management,
and personnel. Accounting staff oversee the budget,
expend the funds allotted, handle the purchasing and pay-roll
functions, maintain the supplies inventory, and super-vise
the printing operation that produces the reports
released by the Office of the State Auditor. Clerical sup-port
staff are responsible for reception, word processing,
filing, and other clerical support duties. The information
resource management group administers office automa-tion,
data communications, and management informa-tion
systems for the office. Personnel staff handle the
recruitment, hiring, salary administration, and employee
benefits functions.
Two deputy state auditors are responsible for the
office’s field audit activities. Audits are assigned to audit
managers according to audit type and geographic
location. The audit managers each have several audit
teams that are led by audit supervisors. These audit teams
conduct the audit field work and draft audit reports.
Research and training staff support the audit function
by coordinating continuing professional education, over-seeing
professional policies and procedures, and coordi-nating
reviews of audits to ensure quality. This group also
provides a training program for non- audit personnel.
The Fraud, Waste, and Abuse ( Hotline) staff is charged
6
Smart Start
Audit Teams
NGO MIS Staff Purchasing Budget Office
Specialist
Manager
Nongovernmental
Audits
Raleigh and
Branch Offices
Audit Teams
Field Audit
Managers
Budget/
Accounting
Director
MIS
Receptionist
Director of
Investigative
Audits
( Hotline)
Deputy
for General
Government and
Performance Audits
Managers
General
Government
Audits
Manager
Performance
Audits
General
Government
Audit Teams
Performance
Audit
Teams
Director of
Information
Systems
Audits
Director
for
Training
Information
Systems
Auditors
Deputy
for
Administration
Deputy for Field
and
Nongovernmental
Audits
Personnel
Officer
Support
Staff
Audit
Publication
Coordinator
Chief Deputy
State Auditor
Executive
Secretary
Legislative
Liaison ( vacant)
Confidential
Secretary
Administrative
Assistant
General
Counsel
State
Auditor
Personnel
Staff
OVERVIEW
Figure 2
OFFICE OF THE STATE AUDITOR
ORGANIZATIONAL CHART
with meeting statutory responsibilities ( §    -   .  ( c)   and
   .   ) for investigating instances of alleged improper gov-ernmental
activities and protecting those who may make
such allegations. A manager leads this unit and reports
directly to the chief deputy state auditor.
Many of the professional staff hold professional cer-tifications
as either certified public accountants, certified
fraud examiners, certified government financial man-agers,
certified information system auditors, and certi-fied
public managers. In addition, many of the staff hold
advanced degrees in accounting, business administration,
public administration, and law ( Figure  ).
QUALITY ASSURANCE
The office’s work is governed by strict adherence to
professional standards promulgated by government
agencies and professional organizations including the
Government Auditing Standards Board, the Financial
Accounting Standards Board, the Federal Office of
Management and Budget, the American Institute of
Certified Public Accountants, as well as various state
and federal laws and regulations. These standards
require that auditors remain independent, receive con-tinuing
professional education, and address the role of
the auditee in resolving and tracking findings and rec-ommendations.
The Office of the State Auditor has a control system
to ensure the quality of audit work. The system includes
supervisory review of all work product as well as man-agement
review of audit reports and critical supporting
working papers. Staff who did not participate in an audit
periodically review the work.
An independent CPA firm annually conducts a finan-cial
audit of the office and routinely issues a clean opinion
of its financial statements. Additionally, the office receives
a peer review every three years under the direction of the
National State Auditors Association. During the peer
review, members of audit staffs from other states review
the office’s quality assurance system and working papers
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
7
SUPPORT STAFF ( left to right): Pete Rose, Gail Musser, Ann Moore,
Becky Weaver, Debbie Rice, Gayle Lemons, Supervisor Pat Heggie,
Jazel Henning, Debbie Richerson, Mary Days. Not shown: Kay Denning
AUDIT MANAGERS ( left to right): Lee Linker, Linda Hollar, David
Nance, Joyce Flowers, Jeff Henderson, Janet Hayes, Dale Place, Stan
Wesner. Not shown: Faye Steele
RESEARCH AND TRAINING ( left to right): Allen Hicks,
Director Beth Wood
8
OVERVIEW
Figure 3.
AGENCY PERSONNEL BREAKDOWN
BY JOB DESCRIPTION
Figure 4.
ADVANCED DEGREES AND PROFESSIONAL
CERTIFICATIONS HELD BY STAFF OF THE
OFFICE OF THE STATE AUDITOR
78.9% Field Auditors
5.7% Information Systems Auditors
5.2% Administration
5.2% Support
2.6% Budget/ Personnel
2.6% Management Information Systems
30.5% Certified Public Accountant
18.6% Masters Degree
4.2% Certified Fraud Examiner
5.7% Certified Information systems Auditor
2.6% Certified Internal Auditor
2.1% Certified Government Financial Manager
2.1% Juris Doctor
1.1% Certified Public Manager
Figure 5.
DISTRIBUTION OF AUDIT HOURS TO EACH
AUDIT TYPE FOR THE 2002– 2003 FISCAL YEAR
80% Financial Audits
11% Performance Audits
6% Information Systems Audits
3% Fraud, Waste, and Abuse Investigations
Table 2.
STATEMENT OF REVENUES AND
EXPENDITURES BUDGETARY ( CASH) BASIS
Fiscal Year Ended June 30, 2003 ( Unaudited)
Expenditures
Personnel Services $ 11,127,719.80
Purchased Services 1,327,064.40
Supplies 51,226.35
Property, Plant and Equipment 234,491.24
Other 33,286.55
Transfers Out 36,473.00
Total Expenditures $ 12,810,261.34
Revenues
Sale of Equipment $ 50.00
Transfers In ( Billed Services) 2,694,220.00
Transfer in from CCPS for Terrorism 140,000.00
Transfer in from Juvenile Justice 100,000.00
Total Revenues $ 2,934,270.00
State Appropriations $ 9,875,991.34
for compliance with auditing standards. The most recent
peer review was performed during June     and
resulted in a clean opinion.
FINANCES
The office receives most of its funding through appro-priations
from the General Assembly. In addition, state
agencies, universities, and community colleges are billed
on a cost- reimbursement basis for work performed in fed-eral
compliance audits as specified in the federal Office of
Management and Budget Circular A-    . On request, the
office audits certain other public entities on a cost- reim-bursement
basis.
Salaries and benefits account for most expenditures
( Table  ). In addition, the office recently has made sig-nificant
investments in computer technology to improve
the effectiveness and efficiency of audits. During the
    ‒     fiscal year, the Office of the State Auditor com-pleted
its move to the newly renovated Old Revenue
Building. This move increased capital expenditures due
to the need to purchase furniture and fixtures as well as
associated moving expenses.
TYPES OF SERVICES
The Office of the State Auditor conducts financial,
performance, and information systems audits as well as
fraud, waste, and abuse investigations. Financial audits
were the largest segment (   %) of audit hours for the
    ‒     fiscal year. Each type of engagement is
discussed in more detail in Figure  .
9
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
T E C H N O L O G Y
The digital revolution of the last decade has left virtually no
segment of our society untouched, including government agen-cies
and operations. As government has changed, auditors
also have had to change to fulfill their roles as watchdogs.
Miniature calculators that replaced unwieldy adding
machines were but the first step in that evolution of the
accounting industry. Over the last decade, every team in the
Office of the State Auditor has been equipped with laptop
computers, portable printers and other technological equip-ment
to help them perform their duties.
In the last fiscal year, the office instituted a number of tech-noligical
innovations that have driven the era of green eye-shades
and armbands even deeper into the past.
Those innovations, highlighted in this annual report, include
a unique digital distribution system that makes all of our
reports available to state officials and the public at the touch
of a button; an expanding pilot project that replaced the tan-gled
nest of wiring connecting team members with new wire-less
units that communicate by radio signal; and specialized
accounting software for every field auditor that electronically
analyzes financial data, and stores work papers that once
required multiple boxes on a single compact disc.
And we are not finished. We are constantly assessing tech-nology
improvements that will make us more efficient, more
effective and more accountable to the public we serve.
S FINANCIAL AUDITS
11
taff in the Financial Audit Section audit state
agencies, universities, community colleges, clerks of
superior court, and Smart Start nonprofit organizations.
Most audits are required as part of the statutory duties
of the state auditor or to comply with requirements of
the Federal government. Some audits are performed at
the state auditor’s discretion to ensure that all agencies
are properly reporting their financial conditions.
The Office of the State Auditor spent the greatest per-centage
of hours ( 42%) to perform annual financial state-ment
audits/ reviews of the State’s sixteen universities
and fifty- nine community colleges ( Figure 6). One of its
largest financial audits is the state’s Comprehensive Annual
Financial Report ( CAFR), which accounted for 15 percent
of staff hours. The CAFR
contains the annual financial
statements for the state of
North Carolina as a whole.
Another major financial audit
project, accounting for 17
percent of staff time, is the
state’s Single Audit Report. The
Single Audit Report contains
the results of the audit of the
state’s financial statements as
well as the audit of the state’s
compliance with laws and
regulations pertaining to fed-eral
grant programs. The
office also periodically audits
selected fiscal controls of
clerks of superior court and
general government agen-cies.
The non- governmental audit staff conducts financial
and compliance audits of the organizations participating
in the Smart Start program, including the statewide coor-dinating
agency ( the North Carolina Partnership for
Children, Inc.) and the individual local partnerships.
Smart Start is an early childhood development program
designed to prepare children to begin school healthy and
ready to succeed. Currently, 82 Smart Start partnerships
operate throughout the state. Due to the increasing num-ber
of local partnerships and our limited staff resources,
some local partnership audits were performed by local
CPA firms under contract with the Office of the State
Auditor. The state auditor’s staff reviews draft reports of
these audits for compliance with auditing standards.
AUDIT RESULTS SUMMARY
2002– 2003
For the ninth consecutive
year, the state auditor issued
an unqualified opinion1 on
the state’s financial state-ments.
For the year ended
June 30, 2003, this opinion
was contained in the CAFR
prepared by the Office of the
State Controller.
The state of North Car-olina
also received the Cer-tificate
of Achievement for
Excellence in Financial Report-ing
from the Government
Finance Officers Association
for the ninth consecutive
year. This award is given to
Figure 6.
DISTRIBUTION OF FINANCIAL AUDIT HOURS
TO EACH AUDIT TYPE FOR
THE 2002– 2003 FISCAL YEAR
42% Universities and Community Colleges
15% Comprehensive Annual Financial Report
17% Single Audit
10% Smart Start
8% Clerks of Court
1% Component Units
7% General Government Agencies
12
FINANCIAL AUDIT SECTION
government units whose CAFR achieves the highest stan-dards
in government accounting and financial reporting.
In conjunction with the audit of the state’s financial
statements, the state auditor issues a report on compli-ance
and internal control over financial reporting in the
Single Audit Report. Twenty- five findings of non- com-pliance
and/ or weaknesses in internal control related to
the financial statement audit were reported. These find-ings
disclosed internal control deficencies related to
investing activities, refunds of retirement contributions
and motor fuel taxes, billing and collection of water and
sewer fees, fixed asset records, access to computer sys-tems,
payment of unemployment insurance claims and
health plan administrative charges, and year- end finan-cial
reporting.
With regard to compliance with federal program
requirements, the state auditor issued a qualified opin-
Table 3.
SINGLE AUDIT FINDINGS
FOR 2002– 2003
Compliance Requirement Number of Findings
Subrecipient Monitoring 20
Allowable Cost / Cost Principles 18
Cash Management 4
Procurement and Suspension, and Debarment 11
Reporting 1
Matching, Level of Effort, and Earmarking 2
Eligibility 6
Equipment and Real Property Management 2
Period of Availablity of Federal Funds 1
Special Tests and Provisions 5
Total 70
13
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
ion1 on certain federal programs due to material weak-nesses
and other reportable conditions,. In total, audi-tors
identified $ 14.9 million in questioned costs resulting
from 70 identified audit findings ( Table 3).
In addition to reporting on the CAFR and Single
Audit at the statewide level, the office publishes in sep-arately
issued reports the audit findings and recom-mendations
from CAFR and Single Audit work for each
individual government agency. The agencies for which
such findings and recommendations were issued are
highlighted in Table 4. Copies of reports issued by the
office of the state auditor may be requested at our web
site, www. ncauditor. net, or by calling ( 919) 807- 7500.
Reported findings from university and community col-lege
audits/ reviews for fiscal year 2003 primarily related
to internal control weaknesses in areas such as bank
account reconciliation, fixed assets, cash receipts, and
financial statement preparation. Table 5 presents a list of
these university and community colleges, as well as audits
of financial statements of other agencies prepared in
accordance with generally accepted accounting principles.
Table 4.
OFFICE OF THE STATE AUDITOR
REPORTS OF FINDINGS AND RECOMMENDATIONS
FROM CAFR AND SINGLE AUDIT PRIMARY
GOVERNMENT AGENCIES
Reports Issued During Year Ended June 30, 2003
Findings Reported
Audited Entity Yes No
Department of Administration 1
Department of Commerce 1
Dept. of Crime Control & Public Safety 2
Dept. of Environment & Natural Resources n
Department of Revenue 1
Department of the State Treasurer 5
Department of Transportation 9
Employment Security Commission 3
Teachers and St. Employees
Major Medical Plan 10
Office of State Budget and Management n
Office of the State Controller n
Health and Human Services 3
Department of Public Instruction 2
Department of Correction 2
14
FINANCIAL AUDITS
In the fiscal 2003 Clerk of Superior Court audits, the
office of the state auditor noted weaknesses in areas such
as separation of duties, timely deposits, bank reconcili-ations
and proper recording of bonds. In the 2003 fiscal
control audits of general government agencies, internal
control weaknesses were reported in such areas as pen-sion
payments, allowance payments, capital assets, pay-roll,
personal service contracts and ticket sales. Fiscal
control audit reports issued during the year ended June
30, 2003, appear in Table 6.
Smart Start findings issued during 2002– 2003 focused
on the lack of policies and procedures, the need for
proper internal controls for processing of transactions,
the assignment of tasks to eliminate separation of duties
problems, contract management and monitoring, com-petitive
bidding, and financial presentation and report-ing.
Audit reports issued during the year ended June 30,
2003 are presented in Table 7.
NOTES
1. An unqualified opinion is an opinion expressed without any reserva-tions
by an auditor on the financial statements. Audited entities that
receive unqualified opinions are considered, in the auditor’s profes-sional
judgment, to have presented fairly in all material respects their
financial statements for the period audited.
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Findings Reported
Audited Entity Yes No
Universities and Affiliates:
Appalachian State University n
East Carolina University n
Elizabeth City State University n
Fayetteville State University n
NC Agricultural and Technical University n
North Carolina Central University n
North Carolina School of the Arts n
North Carolina State University n
University of North Carolina at Asheville n
University of North Carolina at Chapel Hill n
University of North Carolina at Charlotte n
University of North Carolina at Greensboro n
University of North Carolina at Pembroke n
University of North Carolina at Wilmington n
Western Carolina University n
Winston- Salem State University n
NC School of Science and Mathematics n
University of North Carolina Hospitals n
Community Colleges:
Alamance Community College n
Beaufort County Community College n
Bladen Community College n
Blue Ridge Community College n
Brunswick Community College n
Cape Fear Community College n
Carteret Community College n
Catawba Valley Community College n
Central Carolina Community College n
Cleveland Community College n
Coastal Carolina Community College n
College of the Albemarle n
Craven Community College n
Davidson County Community College n
Edgecombe Community College n
Fayetteville Technical Community College n
Forsyth Technical Community College n
Johnston Community College n
Findings Reported
Audited Entity Yes No
Community Colleges continued:
Table 5.
OFFICE OF THE STATE AUDITOR REPORTS OF FINDINGS AND RECOMMENDATIONS
Reports Issued During Year Ended June 30, 2003
Guilford Technical Community College n
Halifax Community College n
Haywood Community College n
Isothermal Community College n
James Sprunt Community College n
Lenoir Community College n
Martin Community College n
McDowell Technical Community College n
Mitchell Community College n
Montgomery Community College n
Nash Community College n
Pamlico Community College n
Pitt Community College n
Randolph Community College n
Richmond Community College n
Roanoke- Chowan Community College n
Robeson Community College n
Rockingham Community College n
Sampson Community College n
Sandhills Community College n
Southeastern Community College n
Vance- Granville Community College n
South Piedmont Community College n
Stanly Community College n
Wake Technical Community College n
Wayne Community College n
Wilson Technical Community College n
Other:
NC Ports Railway Commission n
NC State Ports Authority n
NC State Ports Authority Bulk Handling Facility n
U. S. S. North Carolina Battleship n
Town of Butner Water and Sewer Systems n
Global Transpark n
Clean Water and Drinking Water Funds n
State Treasurer Investment Pool n
Wireless 911 Board n
15
16
FINANCIAL AUDITS
Findings Reported
Audited Entity Yes No
Clerks of Superior Court continued:
Table 6.
OFFICE OF THE STATE AUDITOR AUDITS OF FISCAL CONTROLS AT
CLERKS OF SUPERIOR COURT AND GENERAL GOVERNMENT AGENCIES
Reports Issued During Year Ended June 30, 2003
Findings Reported
Audited Entity Yes No
Clerks of Superior Court:
Alamance County Clerk of Superior Court n
Alexander County Clerk of Superior Court n
Alleghany County Clerk of Superior Court n
Anson County Clerk of Superior Court n
Ashe County Clerk of Superior Court n
Avery County Clerk of Superior Court n
Buncombe County Clerk of Superior Court n
Burke County Clerk of Superior Court n
Cabarrus County Clerk of Superior Court n
Caldwell County Clerk of Superior Court n
Caswell County Clerk of Superior Court n
Catawba County Clerk of Superior Court n
Chatham County Clerk of Superior Court n
Cherokee County Clerk of Superior Court n
Cleveland County Clerk of Superior Court n
Davidson County Clerk of Superior Court n
Davie County Clerk of Superior Court n
Durham County Clerk of Superior Court n
Forsyth County Clerk of Superior Court n
Gaston County Clerk of Superior Court n
Graham County Clerk of Superior Court n
Granville County Clerk of Superior Court n
Guilford County Clerk of Superior Court n
Iredell County Clerk of Superior Court n
Jackson County Clerk of Superior Court n
Johnston County Clerk of Superior Court n
Lincoln County Clerk of Superior Court n
Macon County Clerk of Superior Court n
Madison County Clerk of Superior Court n
McDowell County Clerk of Superior Court n
Mecklenburg County Clerk of Superior Court n
Mitchell County Clerk of Superior Court n
Nash County Clerk of Superior Court n
Orange County Clerk of Superior Court n
Person County Clerk of Superior Court n
Randolph County Clerk of Superior Court n
Rockingham County Clerk of Superior Court n
Rowan County County Clerk of Superior Court n
Rutherford County Clerk of Superior Court n
Stanly County Clerk of Superior Court n
Stokes County Clerk of Superior Court n
Surry County Clerk of Superior Court n
Transylvania County Clerk of Superior Court n
Union County Clerk of Superior Court n
Watauga County Clerk of Superior Court n
Wayne County Clerk of Superior Court n
Yadkin County Clerk of Superior Court n
Yancey County Clerk of Superior Court n
General Government Agencies:
Department of Labor n
Department of Justice n
Department of Agriculture & Consumer Services n
Office of the Lieutenant Governor n
Health and Wellness Trust Fund n
Tobacco Trust Fund n
NC State Fair n
17
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Findings Reported
Audited Entity Yes No
Alamance Partnership for Children n
Albermarle Smart Start Partnership, Inc. n
Alexander County Partnership for Children n
Alleghany Partnership for Children, Inc. n
Anson County Partnership for Children n
Ashe County Partnership for Children n
Avery County Partnership for Children, Inc. n
Beaufort County Partnership for Children n
Bladen County Partnership for Children, Inc. n
Brunswick County Partnership for Children, Inc. n
Buncombe County Partnership for Children, Inc. n
Burke County Partnership for Children, Inc. n
Cabarrus County Partnership for Children n
Caswell County Partnership for Children n
Catawba County Partnership for Children n
Chatham County Partnership for Children n
Children and Youth Partnership
for Dare County, Inc. n
Children’s Council of Watuaga County, Inc. n
Chowan/ Gates/ Perquimans Partnership
for Children n
Cleveland County Partnership for Children, Inc. n
Columbus County Partnership for Children, Inc. n
Communities in Schools of Caldwell County n
Craven County Partnership for Children n
Cumberland County Partnership for Children, Inc. n
Davidson County Smart Start, Inc. n
Davie County Partnership for Children, Inc. n
Down East Partnership for Children n
Duplin County Partnership for Children n
Durham’s Partnership for Children n
Forsyth Early Childhood Partnership n
Franklin/ Granville/ Vance Partnership
for Children, Inc. n
Guilford County Partnership for Children, Inc. n
Harnett County Partnership for Children, Inc. n
Henderson County Partnership for Children, Inc. n
Hertford County Partnership for Children, Inc. n
Hoke County Partnership for Children and Families n
Hyde County Partnership for Children n
Iredell County Partnership for Young Children, Inc. n
Johnston County Partnership for Children, Inc. n
Jones/ Carteret County Partnership for Children n
Lee County Partnership for Children n
Lenoir/ Greene County Partnership for Children n
Table 7.
OFFICE OF THE STATE AUDITOR
FINANCIAL AND COMPLIANCE AUDITS OF SMART START PARTNERSHIPS
Reports Issued During Year Ended June 30, 2003
Madison County Partnership for Children
and Families, Inc. n
Martin/ Pitt Partnership for Children, Inc. n
McDowell County Partnership for Children
and Families, Inc. n
Mecklenburg Partnership for Children n
Montgomery County Partnership for Children, Inc. n
New Hanover County Partnership for Children n
North Carolina Partnership Children, Inc. n
Northampton Partnership for Children, Inc. n
Onslow County Partnership for Children, Inc. n
Orange County Partnership for Young Children n
Pamlico Partnership for Children, Inc. n
Partners for Children and Families, Inc. ( Moore) n
Partnership for Children for Lincoln
Gaston Counties, Inc. n
Pender County Partnership for Children, Inc. n
Person County Partnership for Children, Inc. n
Polk County Partnership for Children, Inc. n
Randolph County Partnership for Children n
Region A Partnership for Children n
Richmond County Partnership for Children n
Robeson County Partnership for Children n
Rockingham County Partnership for Children, Inc. n
Rowan Partnership for Children, Inc. n
Rutherford County Partnership for Children, Inc. n
Sampson County Partnership for Children n
Scotland County Partnership for Children
and Families, Inc. n
Stanly County Partnership for Children, Inc. n
Stokes Partnership for Children n
Surry County Early Childhood Partnership n
The Bertie County Partnership for Children, Inc. n
The Halifax- Warren Smart Start Partnership
for Children, Inc. n
The Mitchell- Yancey Partnership for Children, Inc. n
The Transylvania County Partnership for Children, Inc. n
Tyrrell County Smart Start, Inc. n
Union County Partnership for Children n
Wake County Smart Start, Inc. n
Washington County Child Advocacy Council, Inc. n
Wayne County Partnership for Children, Inc. n
Wilkes County Partnership for children, Inc. n
Wilson County Partnership for Children n
Yadkin County Smart Start Partnership, Inc. n
Findings Reported
Audited Entity Yes No
ELECTRONIC PUBLICATION SYSTEM ( EPS)
For decades, reports from the Office of the State Auditor were
distributed in the same way: hundreds of printed copies stuffed
by hand into envelopes and mailed to state officials and mem-bers
of the public who had requested the reports.
That system changed dramatically in November 2001 when
OSA inaugurated its fully automated Electronic Publication
System.
Using digital technology and the World Wide Web, EPS now
distributes audit reports and management letters electronically
to legislators, state agencies, media outlets and the public.
And with EPS, those customers get only the reports they have
requested from the more than 300 produced each year by the
Office of the State Auditor.
Posting information on a web page available to the public is
an “ old” strategy in the rapidly changing world of technology.
But information posted on the Web is useful only if the person
who wants that information knows it is there.
EPS adds that missing element, automatically sending an
email to people who have subscribed for a specific report the
instant that report is posted. The email includes a live link that
takes the recipient to a synopsis of the report and the full report
itself.
In less than a year, nearly 700 legislators, state officials,
reporters and members of the public have used EPS to target
the reports they want to see.
As a result, audit reports are now distributed more efficiently
and are more readily available than in the past. At the same
time, costs for printing, mailing and handling reports have
dropped dramatically.
19
P erformance audits are defined as… “ an objective and sys-tematic
examination of evidence for the purpose of pro-viding
an independent assessment of the performance
of a government organization, program, activity, or
function in order to improve public accountability and
facilitate decision- making by parties with responsibility
to oversee or initiate corrective action.” Performance
audits are selected through a variety of means including
mandates from the General Assembly; requests from the
Governor, members of the General Assembly, depart-ment/
agency heads, or private citizens; and areas of con-cern
identified in other audits performed by the state
auditor. The objectives of each audit are determined
based on the agency, program, or area to be audited as
well as the reason for the audit.
SUMMARY OF AUDIT RESULTS FOR 2002– 2003
The office issued five performance audit reports this year,
with much of the work conducted by the Performance
Audit staff directed to a few very large audits.
n North Carolina Food Safety System ( a performance
review)
n State Construction Process and the State Construc-tion
Office
n North Carolina Partnership for Children, Inc. and the
Smart Start Program
n Youth Development Centers and Juvenile Detention
Centers within the North Carolina Department of
Juvenile Justice and Delinquency Prevention
n North Carolina State Education Assistance Authority
North Carolina Food Safety System- Performance Review
The United States General Accounting Office ( GAO)
requested the North Carolina state auditor’s office par-ticipate
in its initiative to examine the physical security
of food processing plants and warehouses. As the plan-ning
progressed, the participating states found that no
state agency has the authority to review in detail the phys-ical
security of these establishments. Therefore, the GAO
narrowed its scope to a survey of state activities in this
area. North Carolina participated in this survey. Auditors
conducted on- site survey work from March to September
2002 at the Department of Agriculture and Consumer
Affairs, the Department of Health and Human Services,
and the Department of Environment and Natural
Resources. North Carolina has a fragmented food safety
system that splits responsibility among these agencies as
well as local governmental units. Food establishments
may be visited annually by a number of inspectors for
different regulatory requirements. The split in authority
hampers the effectiveness of the system in some areas.
North Carolina agencies assure safe and wholesome food
through prevention, detection, and response programs.
Additionally, since the events of September 11, 2001,
North Carolina has taken a number of steps to prevent,
detect, and respond to specific food terrorist acts.
The review identified a number of areas that should
be explored in further detail. Those include the limited
enforcement actions that can be taken when violations
are cited at food establishments; inconsistencies in the
frequency of inspections and sample collections; staffing
shortages, lack of risk assessment tools and lack of a
comprehensive list of establishments requiring inspec-tions;
and the lack of technological resources and use of
antiquated laboratory equipment.
The State Construction Process and the State
Construction Office The State Construction Office
PERFORMANCE AUDITS
20
PERFORMANCE AUDITS
( SCO) within the Department of Administration is
charged with implementing, managing, and coordi-nating
the state’s capital improvement program under
the rules and regulations established by the State
Building Commission ( Commission). A number of
other state agencies also have oversight or regulatory
responsibilities for specific parts of state construction
projects. One June 30, 2002, there were 1,316 on- going
state construction projects with a total value of $ 4.6 bil-lion;
640 of those were in the construction phase, with
676 in the design phase. Of the total projects, 196 were
community college projects, 525 were university proj-ects,
and 595 were state agency projects.
This audit of the state construction process and the
State Construction Office, within the Department of
Administration, was undertaken at the discretion of the
state auditor. The major focus of the audit was an exam-ination
of the agency’s project management function,
organization and staffing, and its role in the Higher
Education Bond projects. Fieldwork was conducted from
May 2001 through August 2002.
Overall, the State Construction Office has effectively
provided needed services within the constraints con-tained
in legislation and regulations. However, the report
suggested that increased staffing, additional technology
funds and streamlining could improve the agency’s per-formance.
Auditors had difficulty assigning specific sav-ings
to some recommendations because the savings
would depend on the specifics of future projects. But the
report projected a range of savings from $ 150 million to
$ 400 million if the recommendations are implemented.
North Carolina Partnership for Children, Inc. and the Smart
Start Program This performance audit of the North
Carolina Partnership for Children, Inc. ( NCPC) and the
82 local partnerships was undertaken at the discretion of
the state auditor after numerous questions raised by leg-islators
and the public about the program. The North
Carolina Smart Start program is an early childhood ini-tiative
designed to ensure that young children begin school
healthy and ready to succeed. Smart Start, a public- pri-vate
initiative, provides early care and education funding
The Smart Start unit made its annual pilgrimage for story time to a Raleigh day- care center. Entertaining the preschoolers, from left to right, were
Tigger, Butch Kay; Grumpy, Jackie Taylor; Minnie Mouse, Jennifer Trivette; Scooby Doo, Badir Mamedov; The Beast, Nongovernmental Audit
Manager David Nance; and the Big Bad Wolf, Eric Meymandi. The group performed at KidWorks in mid- April.
21
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
to all of the state’s 100 counties. Legislation called for a
state- level partnership to provide funding and technical
assistance ( NCPC) and county- level partnerships that
would design and implement programs and services to
meet local needs. Currently, 82 local partnerships are
established throughout the state to administer funding
and programs. The North Carolina Partnership for
Children, Inc. and local partnerships are classified as
501( c)( 3) non- profit organizations. Since these partner-ships
are not state entities, they are not required to follow
regulations used by state agencies for purchasing, con-tracting
and other functions. They are only required to
follow regulations explicitly written into the General
Statutes for the Smart Start program.
The major finding was that state appropriations are
the primary funding source for Smart Start, providing
95% of all Smart Start funding. In total, the state has
appropriated $ 1.1 billion for the program since its incep-tion
in 1993 through fiscal year 2001- 02. The majority of
Smart Start funds are spent on either direct services or
contracts and grants to direct service providers. In gen-eral,
expenditures at the 16 partnerships visited were rea-sonable
and necessary, complied with regulations, and
related to program objectives. However, we identified
some unreasonable or unnecessary expenditures that
may be indicative of systemic problems. Other expen-ditures
questioned were prohibited by legislation. The
General Assembly should consider requiring the Smart
Start Program to follow state budgeting regulations.
While local partnerships generally gave NCPC high
marks for providing effective assistance and timely
responses, strategic planning documents at NCPC were
not readily available and were unorganized and incom-plete.
Board minutes at both the state and the local part-nerships
were not consistent, and in some cases, did not
contain adequate documentation. We also noted some
concerns with quorums, attendance, and mandated
memberships. While job descriptions indicated the need
for extensive travel by NCPC monitoring and technical
assistance staff, the actual travel for direct monitoring
and assistance was considerably less. Finally, we noted a
lack of follow- up by NCPC on corrective action taken
by local partnerships regarding monitoring issues. NCPC
should increase its administrative oversight and moni-toring
activities.
Since Smart Start does not track individual children
through its programs and into school, it has a limited
ability to show short- term or long- term benefits from
the program. The Smart Start evaluation program cur-rently
conducted by the Frank Porter Graham Child
Development Institute at the University of North
Carolina at Chapel Hill should be reviewed and validated
by an independent source since the Institute has been
involved in the Smart Start program since its inception.
In general, the approved local program activities relate
to Smart Start’s mission, goals, and objectives. However,
some approved activities may have only a marginal rela-tionship
to the primary mission of the program even
though they address an identified need at the local level.
The State Partnership and the local partnerships should
ensure that all approved activities closely relate to the pro-gram
objectives. A number of the activities at the local
The Beast and the Big Bad Wolf were mobbed by adoring fans at
KidWorks after performing for story time.
22
PERFORMANCE AUDITS
level were the same as those offered through the new
More at Four program. In fact, 43% of the More at Four
grants, representing 63% of the grant funds, were to local
partnerships. Based on similarities between the Smart
Start and More at Four programs, the two should be
combined to improve coordination of services, account-ability
of programs, and reduce administrative costs and
confusion/ competition between the programs.
Youth Development Centers and Juvenile Detention Centers
within the North Carolina Department of Juvenile Justice
and Delinquency Prevention This performance audit of
the youth development centers and juvenile detention
centers within the North Carolina Department of Juvenile
Justice and Delinquency Prevention was undertaken at
the request of the Buncombe County legislative delega-tion.
The scope of the audit encompassed the entire
department with an emphasis on the five youth develop-ment
centers and the 14 detention centers located across
the state. Established in 2000, a major part of the depart-ment’s
mission is to coordinate juvenile justice strategies
in North Carolina by overseeing the state’s juvenile court
offices, development, and detention centers. North
Carolina’s juvenile courts have jurisdiction over anyone
charged with a crime who was under the age of 18 ( up to
age 21 in certain situations) at the time of the offense,
arrest, or referral to court. Juveniles awaiting a court
appearance or ordered held for brief periods generally are
sent to one of 14 detention centers. Ten of those centers
are operated by the state and four by counties, with a total
of 322 beds. Once a juvenile has been judged delinquent
by a court, he is assigned to one of the five youth devel-opment
centers operated by the department’s youth
development division. There are 705 youth development
center beds in those five centers.
The youth development centers are housed in facili-ties
that are, for the most part, over 60 years old. Half of
the detention centers are 30 to 40 years old. Most centers
are in poor physical condition, and the age and
construction of the centers increases the security risks.
Two of the five youth development centers do not have
security fences, and the use of electronic security meas-ures
is virtually non- existent. The centers’ campus- style
layouts further increase security risks by requiring offend-ers
to be moved from secured housing units to less
secure buildings for meals, classes, or other reasons.
Abandoned buildings obscure lines of sight allowing
opportunities for escapes. Poor building layouts and high
juvenile- to- staff ratios lessen the safety for both offend-ers
and staff. Some detention centers are overcrowded,
which can increase the stress on both offenders and staff.
Due to inconsistent policies and procedures, staff is con-fused
over what, when, and to whom to report sus-pected
incidents of abuse and neglect. Estimated repair
and renovation costs for the existing centers is about $ 44
million. The department estimates construction of three
new youth development center facilities to replace the
existing ones to be $ 90 million.
The youth development center schools, classified as
alternative schools by the state, use North Carolina’s
standard course of study even though the requirements
are not applicable to a substantial number of juvenile
offenders. Approximately 61% of offenders have specific
identified therapeutic and educational needs when com-mitted
to the centers, with about 60% of them not func-tionally
literate according to center teachers. On average,
only 13.2% of the offenders complete a GED while at
the centers. Further, vocational programs varied at the
centers, community leaders had little input into the voca-tional
education courses offered, and there was no sys-tematic
follow- up to assess vocational training or to assist
juveniles in obtaining jobs in areas where they had
received training. Youth development center instruc-tional
budgets were not sufficient, did not include any
funding from local education authorities, and did not
have any input from education staff at the centers.
There is a lack of clarity about the importance and role
of clinical treatment and rehabilitation in the system.
23
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Programs are disorganized, lack resources, and may not
be allocated enough time. However, the assessment and
treatment center approach now being used offers the
potential for significant improvement. While several model
programs are on- going within the system, major short-comings
noted included the need for more group treat-ment,
family treatment, and increased one- to- one therapy.
Provision of these services would better justify the state’s
$ 55,029 annual investment in each juvenile offender.
Sixty- two percent of the department’s staff ( 1,233 of
1,994) work in the Youth Development Division. Sixty-one
percent of the vacant positions were at the youth
development and detention centers, with vacancies
remaining open for over a year on average. While there
has been extensive job shifting since the creation of the
department, the centers have suffered a net loss of 211
positions, mostly due to cuts caused by the state’s budget
situation. Turnover rates for the centers have been high,
averaging almost 20% annually, with turnover rates for
some positions as high as 55% ( cottage parent). That has
resulted in uneven staff distribution for the centers.
DJJDP has not established target ratios for the different
types of staff at the centers to help balance staffing.
Staff training polices were inconsistent and appeared
to be inadequate for certain types of employees. The
centers have not consistently provided the required
orientation and in- service training for employees, and
some of the training provided was not timely. Some cen-ter
personnel working directly with juvenile offenders,
for instance, did not receive basic training for seven to
eight months after they were hired. Most delays in train-ing
were related to staff and budget shortages.
DJJDP management has faced a number of obstacles
in forming a single, cohesive entity from two separate
divisions in different agencies. While the process of
updating the ten- year- old administrative code brought
over from DHHS and AOC with the respective divisions
continues, the lack of formal policies and procedures
hampers effective operations in the centers since there
is a mixture of old and new policies and procedures.
Changing from a correctional to a therapeutic model
Condemned and abandoned buildings like this one at Stonewall Jackson
Youth Detention Center are a security risk for the youth and staff., audi-tors
found
Wall and ceiling damage at Buncombe Detnetion Center was typical of
what auditors found in the state’s juvenile justice facilities, many of
which date back to the 1930s.
24
PERFORMANCE AUDITS
has led to some communication problems, with educa-tional
or treatment experts in the central office com-municating
directly with specialists at the centers. This
situation has at times left the center directors, who have
overall responsibility for center operations, out of the
information loop and caused communication problems
between the field staff and the central office.
A second major obstacle faced by agency management
has been the absence of readily available data on the juve-nile
population. Prior to 1999 and the formation of the
Department of Juvenile Justice and Delinquency
Prevention, there was no centralized, automated infor-mation
system for juvenile offender data. The department
has been working on a statewide database to manage and
track juvenile offenders. As of January 2003, it has spent
$ 9.8 million in federal and state funds to develop and
implement the project. A major concern for the NC- JOIN
( North Carolina Juvenile Online Information Network)
project is a stable source of funding to complete this proj-ect.
The agency estimates that $ 3.9 million is needed to
complete the design and implementation statewide by
the target date of June 2007. An additional $ 9.3 million is
needed to maintain the technical infrastructure
North Carolina State Education Assistance Authority This
performance audit of the North Carolina State Educa-tion
Assistance Authority was undertaken at the discre-tion
of the state auditor, concentrating on the state
student loan programs. The scope of the audit encom-passed
all operations of the authority, but focused mainly
on the Health, Education, and Welfare Division, which
handles the state- funded loan programs. The Teaching
Fellows Program, administered by the Public School
Forum of North Carolina, also was included since the
authority became responsible for cash collections for the
program during the audit period.
25
PERFORMANCE AUDITS
While the state student loans were not intended to
cover the entire cost of college attendance, the pro-grams’
funding limits are meeting a decreasing portion
of students’ needs over time. Thus, they may not be
meeting the goals of the programs to encourage stu-dents
to repay their state loans through employment in
North Carolina in their selected field. Awarded loan
amounts for most programs have not been adjusted over
the years to reflect the increased cost of tuition since
1989 ( 141% at public universities and 251% at commu-nity
colleges). Students are reported to have an average
loan debt of over $ 12,500 at graduation, even with other
loans, scholarships, and grants. The only program for
which awarded loan amounts have been increased is the
Teaching Fellows Program.
The goal of all state funded loan programs is to pro-vide
financial resources to students, with the hope that
these resources will be repaid through employment in
North Carolina for the specified number of years.
Examination of loan payment data shows that 93.9% of
the loans administered by the authority are repaid, with
72.0% repaid through service. Adding in the data for the
Teaching Fellows Program increases this percentage to
73.2% for repayment through service. Merit- based loans
have a lower default rate than need- based loans. The
Nurse Education Scholarship Loan Program, which is
need- based, has the highest overall default rate at 9.3%.
The authority does not have specific, written guidelines
for administering each of the loan programs, which can
lead to inconsistent administration.
The authority uses two separate databases to admin-ister
the state student loan programs from application
through repayment. This is the result of the merger of
the Health Science and Math Loan Program Division and
the Health Education and Welfare Loan Programs
Division. The two databases contain erroneous and
incomplete monitoring data. They do not have edits in
place to recognize errors, make corrections, or inform
staff that errors have occurred. To improve efficiency and
effectiveness, the authority should develop a combined
database that incorporates edits to flag questionable data.
Additionally, the number of authority staff has increased
by only 6.5% from fiscal year 1997- 98 through 2001- 02,
while the number of loan awards for all loan types has
increased by 86.8%. The Health, Education, and Welfare
Division is handling over 7,500 state student loans in var-ious
stages, an average of 577 loans per person.
Reports issued by the Office of the State Auditor are available
on the web site at www. ncauditor. net under “ Audits.” Printed
copies may be requested by calling ( 919) 807- 7500.
W I R E L E S S N E T W O R K I N G
Equipping audit teams with laptop computers, printers, and
other devices to help them perform their work in remote loca-tions
comes with an immediate and obvious drawback: a
“ spaghetti bowl” of power cords, cables, and connecting lines
that allow information to be shared.
In the tight quarters auditors frequently are asked to use on
field assignments, the wiring sometimes threatens to overwhelm
the equipment itself.
Over the past year, the Office of the State Auditor has imple-mented
a pilot project using wireless technology to resolve that
nagging problem. Field auditors can communicate with each
other and with their home base using radio technology rather
than hard- wired computer systems.
Wireless access, particularly at sites which must be audited
every year, allow field auditors to transmit data between the
audit site and their home base, or among themselves, without
a sprawling mass of wires.
While the pilot project has tested the effectiveness of using
wireless systems to transmit information, it also has tested secu-rity
functions that keep the radio signals and the confidential
data they carry from being intercepted.
27
A INFORMATION SYSTEMS AUDIT
s the State’s operations grew more complex and
sophisticated, with an increased dependence on auto-mated
systems and controls, it became necessary to
devote special attention and resources to those systems.
As a result, the state auditor created the Information
Systems ( IS) Audit division. This section performs audits
on the computer system’s general and application con-trols
that protect an agency’s data. In addition, IS audit
staff members assist other staff auditors in retrieving finan-cial
and statistical data for analysis within their respective
audits as well as provide technical expertise on the audi-tee’s
electronic data processing systems.
SUMMARY OF AUDIT RESULTS FOR 2002– 2003
The reports and other activities of the IS audit division
conducted during 2003– 2003 include:
Department of Transportation— State Titling and
Registration System ( STARS), state Automated Drivers
License System ( SADLS), and International Registration
Plan ( IRP) The primary objective of this audit was to
evaluate controls for the State Titling and Registration
System ( STARS), the State Automated Drivers License
System ( SADLS), and the International Registration Plan
( IRP) applications. We also followed up on prior DOT
information systems access controls audits. The scope
of our audit included a review of application controls
for the three applications and a determination what cor-rective
actions have been taken to resolve the prior access
controls audit findings. Application controls for the appli-cation
systems include data completeness, data accuracy,
table maintenance, user access, processing, and data
backup and recovery. The purpose of application con-trols
is to ensure that as data passes through the appli-cation,
it is complete, accurate, timely and protected
from unauthorized access.
Data completeness controls are designed to ensure
that all transactions are entered into the system once and
only once, that all errors are corrected without any being
lost, duplicated or added, that all transactions are
processed, that databases are updated completely, and
that all output reports are complete. Our audit did not
identify any significant weaknesses in completeness con-trols
for the STARS and IRP applications. However, we
identified a weakness in the completeness controls for
SADLS Motor Vehicle Records ( MVR) online customer
component. This component was designed to only track
one payment per customer each calendar month.
Consequently, multiple payments in the same month by
a customer must be manually calculated and posted to
the database, overwriting the previous amount posted
by the system.
Data accuracy controls ensure that the details of trans-actions
are entered and processed correctly, and that
printed output is not distributed to the user until it is
checked for reasonableness. Our audit did not identify any
significant weaknesses in accuracy controls for the STARS
and IRP applications. However, we identified a weakness
in the accuracy controls for SADLS MVR request. We
found weaknesses in the controls over the payments
received for mail- in Motor Vehicle Report ( MVR) requests.
Controls do not ensure that all payments received are
entered into the system. Systems use tables to make com-putations
and to verify valid codes during data entry.
Table maintenance controls ensure that tables used
in processing include correct and timely values. Our
audit did not identify any significant weaknesses in the
Table maintenance for the STARS and IRP applications.
However, we identified a weakness in the table mainte-nance
for SADLS Duplicate Driver License Internet Web
interface application.
User access controls ensure that only authorized per-sons
are able to inquire about, record, change, or delete
data, that electronic signatures used to approve transac-tions
are valid, that only authorized users receive printed
reports, and that blank negotiable instruments are pro-tected.
We identified several conditions related to user
access for STARS, IRP and SADLS applications, which
should be addressed to improve user access controls.
Processing includes all of the activities associated
with running production jobs. Our audit did not iden-tify
any significant weaknesses in processing for the
STARS, IRP, and SADLS applications.
Data backup and recovery procedures ensure that
the system can be restored if a disaster destroys the pri-mary
data files. To be effective, the backup data files
must be stored in a secure offsite location, and all essen-tial
files should be included. The backup tapes should be
stored in an environmentally safe facility far enough
away from the computer center so that the backups and
the center cannot be both destroyed by a single disaster.
The STARS, IRP, and SADLS application run on the
state’s mainframe computer. Transactions for these appli-cations
are entered and processed as real time updates
to the databases. In the event the mainframe has a dis-ruption
in service, DOT has not established alternative
procedures or provisions to recover these transactions
for the STARS, IRP, or SADLS applications.
Information Systems Access Controls The access
control environment consists of access control software
and information security policies and procedures. We
followed up on prior year access control findings for
DOT to determine corrective actions that have been
taken to resolve the prior audit issues. We found that
many of the same conditions we observed in the prior
audit still exist. DOT is currently in the process of resolv-ing
the majority of these access control findings from
the prior year. Until all findings are resolved, the DOT
access control environment is still not adequate to pro-tect
the critical and sensitive information from unau-thorized
access.
North Carolina State University – General Controls Review
We conducted an Information System ( IS) audit at North
Carolina State University from May 28, 2002, through
October 15, 2002. The primary objective of this audit
was to evaluate the IS general controls in place during
that period. General controls include general security
policies, access controls, program maintenance, physi-cal
security, operations, systems software, telecommu-nications,
and disaster recovery. The general controls
review indicated that all users accessing the University’s
intranet could view operations staff production job out-put
logs via the web using a web browser, such as
Internet Explorer. We also found that the firewall viola-tion
reports are not reviewed for irregular or unautho-rized
activity.
UNC Hospitals— General Controls Review We conducted
an Information System ( IS) audit at UNC Hospitals from
June 3, 2002 through August 30, 2002. The primary
objective of this audit was to evaluate the IS general con-trols
in place during that period. We reviewed the access
controls for the UNC Hospitals mainframe and a UNIX
server. We found several weaknesses in access controls.
We also found that application programmers have the
ability to move and run programs in the Unix produc-tion
environment. We noted that employee access to
computer room was not adequately restricted. The
Hospital does not have a disaster recovery plan in place.
All backup tapes are not adequately stored off site.
Western Carolina University— General Controls Review
We conducted an Information System ( IS) audit at
28
INFORMATION SYSTEMS AUDIT
Western Carolina University from November 18, 2002,
through December 10, 2002. The primary objective of
this audit was to evaluate the IS general controls in place
during that period. We found several weaknesses in
access controls.
UNC Asheville— General Controls Review We conducted
an Information System ( IS) audit at The University of
North Carolina at Asheville from November 13, 2002,
through December 13, 2002. The primary objective of
this audit was to evaluate the IS general controls in place
during that period. We found that the University does
not have written policies and procedures that address key
information technology areas. We found that the
University has not performed a risk assessment of its
information technology resources and information. We
also found that a user who is responsible for Quality
Assurance and Security Administration also has privileges
assigned that grant him the authority equivalent to those
of a Systems Programmer. We found several weaknesses
in access controls. We found that policies and procedures
for user accounts have not been followed.
29
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
A C C O U N T I N G S O F T W A R E
They still are referred to as “ books,” but government financial
records for all practical purposes have long since moved from
paper ledgers and journals to computerized files that automat-ically
record and post transactions.
And the auditors who check those “ books” increasingly are
used digital means to see if they are accurate. In the 2001– 2002
fiscal year, all the field auditors in the Office of the State Auditor
were equipped with specialized auditing software that replaces
physical work papers with digital ones.
The software, loaded on laptop computers, allow auditors to
take random samples of transactions, compute their accuracy
and store the results of that testing on digital work sheets that
are the basis for audit results.
The electronic work papers, which can be burned on a sin-gle
compact disc, replace boxes and boxes of paper records
that previously had to be stored for years.
The Office of the State Auditor also is adding other innova-tions
to improve our business operations, including an on- line
time- reporting system that provides a base for more efficient
audit planning and management. The on- line system also will
help consolidate a number of isolated databases into a single,
shared unit for faster and easier access.
31
FRAUD, WASTE, AND ABUSE ( HOTLINE) T he state auditor is responsible for receiving and
investigating allegations of improper governmental activ-ities
including violations of state or federal laws, rules
or regulations; fraud; misappropriation of state
resources; or substantial and specific danger to the pub-lic
health and safety. The state auditor maintains a 24-
hour, toll- free hotline ( 1- 800- 730- 8477) for state
employees and the general public to report activities they
believe may be illegal or improper. Allegations of fraud,
waste and abuse may also be reported by traditional mail
or via electronic mail at hotline@ ncauditor. net.
Allegations of improper governmental activities,
whether received by telephone or mail, remain confi-dential.
In addition, state law provides protection from
retaliation or discrimination for employees who report
improper or illegal activities to the state auditor.
An investigation is conducted if an allegation appears
to have merit. If the investigation results in the substanti-ation
of the allegation, findings are presented in a special
review report or management letter. When appropriate,
the state auditor refers findings to the State Bureau of
Investigation or other law enforcement agencies.
SUMMARY OF INVESTIGATIVE RESULTS
FOR 2002– 2003
The Investigative Audits Division received 102 allegations
of fraud, waste and abuse during the 2002– 2003 fiscal
year. Of the 81 cases closed during the 2002– 2003 fiscal
year, investigations resulted in the publication of the fol-lowing
special review reports and management letters.
UNC Hospitals/ UNC- Chapel Hill Allegations were
received through the state auditor’s Hotline concerning
payments made to the business Copy Center of Madison,
Wisconsin, for copier toner that was never ordered or
received. During a period of 28 months, checks totaling
$ 10,797 were issued by UNC Hospitals and UNC- Chapel
Hill to the Copy Center of Madison, Wisconsin, in pay-ment
for copier toner. However, department personnel
stated they neither ordered nor received any product
from this company. During the investigation the Copy
Center was able to produce copies of five UPS Delivery
Notifications to UNC Hospitals for unspecified products.
However, no documentation of actual orders was pro-vided,
nor did the delivery notifications indicate the prod-uct
delivered was the toner in question. UNC personnel
responsible for authorizing payment to the Copy Center
said the company was very persistent in its efforts to
obtain payment for the invoices and threatened to turn
the accounts over to a collection service if the invoices
were not paid in a timely manner. In addition, UNC per-sonnel
said a representative of the company stated the
invoices for copier toner were connected to the copier
service routinely used by the University of North Carolina.
However, this copier service, Carolina Copy, denied any
connection between themselves and the Copy Center of
Madison, Wisconsin.
During the investigation, a review of some purported
invoices identified several missing items usually found
on standard invoices such as a purchase order number,
inventory item number and manufacturer listing. In addi-tion,
the price charged by the Copy Center of Madison,
Wisconsin, was significantly higher than the amount
quoted by a local vendor for the same product.
When questioned about the validity of the invoices,
the owner of Copy Center of Madison, Wisconsin,
responded that all orders to his company had been ver-bal
and that toner had in fact been delivered. The owner
32
FRAUD, WASTE, AND ABUSE ( HOTLINE)
was unable to provide documentation to support his
claims and stated he had destroyed the “ UNC records”
because his company no longer did business with the
university.
The investigation identified internal control defi-ciencies
that allowed invoices to be paid without receiv-ing
supporting documentation for the order or a
confirmation the product had been received.
In a management letter, the Office of the State
Auditor made several recommendations regarding pur-chasing
and payment for products. Recommendations
included that all payments related to the purchase of
goods should require evidence of receipts. The state
auditor also recommended personnel authorizing pay-ments
should obtain a thorough understanding of con-tractual
services within their departments to minimize
the risk of paying illegitimate vendors for legitimate
products. In addition, the state auditor recommended
UNC Hospitals and UNC- Chapel Hill initiate legal action
to recover payments made to Copy Center for toner that
was never received nor ordered.
In response to the management letter documenting
the questionable payments, the Chancellor of the
University of North Carolina at Chapel Hill asserted that
his office had issued a memorandum to staff that
addressed the internal control issues raised by the inves-tigation
and that the incident in question had been
referred to the UNC Police for criminal investigation.
North Carolina A& T State University ( NC A& T) From
February 2001 through February 2002, the Office of the
State Auditor received allegations concerning possible
violations of state and university regulations and poli-cies.
The complaints included inappropriate use of state
vehicles by several staff members; performance of sec-ondary
job duties during the regular workday, and; pos-sible
violations of bidding procedures.
An investigation by the Office of the State Auditor sub-stantiated
the allegation that the NC A& T public safety
director commuted in his permanently assigned state
vehicle from Charlotte to Greensboro on a daily basis
without proper approval. The public safety director
admitted he had commuted from his home in Charlotte
to the university in Greensboro for five months after he
was hired. Based on the director’s estimation that the
mileage from his home to the university was 72 miles
each way, the commuting use of the vehicle for five
months ( based on five days a week, four weeks a month)
totaled 14,400 miles. The actual use of the vehicle for
commuting could not be determined due to the lack of
daily or trip mileage logs for the vehicle in question.
The vice chancellor of business and finance for the
university said he had authorized the public safety
director’s use of a state vehicle for commuting for
what he believed would be a temporary amount of
time, believing the director would be moving to the
Greensboro area.
Investigators concluded the director should have
obtained approval from the Division of Motor Fleet
Management to commute in a state vehicle as well as
pay the $ 3 daily commuting fee required by state regu-lations.
Auditors also noted that confusion over vehicle use
as a whole existed at the university. Specifically, auditors
noted inadequate mileage reporting across the board
with regards to state vehicles. Auditors determined most
employees at the university were simply recording a
monthly mileage total with no breakdown of actual trips
or use when mileage was incurred. Such mileage report-ing
did not meet state regulations.
The investigation did not substantiate the allegation
that a tenured professor was violating the university’s
teaching policies by teaching courses at another college.
However, auditors did note regular violations of the uni-versity
policy requiring employees to complete annual
“ Conflict of Interest” and “ Notice of Intent to Engage
in External Professional Activity for Pay” forms.
The investigation did not substantiate the allegation
33
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
that the physical plant failed to follow appropriate com-petitive
pricing policies for a particular vendor. However,
during the investigation auditors identified an instance
where a contractor was paid twice for the same services.
This double payment was due to an ability to circum-vent
an internal control procedure designed to eliminate
payment of duplicate invoice numbers. Accounts
Payable personnel negated the internal control by using
different formats for invoice numbers.
In a management letter, the state auditor recom-mended
that university management review and reiter-ate
the importance of adherence to correct motor fleet
regulations by all employees; review relevant employ-ment
policies and reiterate to employees the necessity
of proper reporting and authorization of all employ-ment
outside the university, and; review internal control
policies and create a standard invoice number format to
prevent more duplicate payments. The Office of the
State Auditor also recommended the university finance
office review a sample of vendor payments to identify
other duplicate payment errors and seek reimbursement
of the $ 6,334 overpayment to the vendor.
In response to the Office of the State Auditor’s man-agement
letter, the UNC A& T Chancellor stated they
concurred with findings and recommendations regard-ing
vehicle use, employee conflict of interest forms and
vendor contracts and bidding procedures. The univer-sity’s
comptroller’s office planned to follow up the audi-tors’
recommendation to seek reimbursement of the
vendor overpayment.
Project Challenge North Carolina, Inc. A caller to the
state auditor’s hotline alleged possible inappropriate use
of grant funds by employees at Project Challenge. In
addition, the allegations included violations of policy
and improper use of organization vehicles. Auditors
34
FRAUD, WASTE, AND ABUSE ( HOTLINE)
found the executive director and four other employees
used the organization’s van for a trip to Florida. The
executive director said the four- day diving trip to the
Florida Keys was a team- building event that was sched-uled
to occur at the end of the group’s attendance at a
conference in Pinehurst. The conference was cancelled
due to a hurricane, but the trip to Florida continued as
planned. Mileage logs for the van indicated the Florida
trip covered 2,466 miles.
In addition, one of the organization employees drove
an organization vehicle to attend the executive director’s
daughter’s wedding in the spring of 1999. The executive
director stated he hired the employee in question to per-form
at the wedding ceremony but did not authorize
use of the vehicle to attend the function.
The executive director said Project Challenge opera-tional
policies and procedures allow for personal and
third- party use of agency vehicles. In addition, Project
Challenge policies allowed for personal use of organi-zation
equipment and property, including telephones,
cellular telephones, calling cards, gas cards, vehicles or
other equipment, with permission of supervisors.
Auditors found that the vehicle in question was pur-chased
in part with funds provided by the Governor’s
Crime Commission and Office of Juvenile Justice. Crime
Commission officials said personal or third- party use of
any property purchased with Governor’s Crime
Commission grant funds is not acceptable, regardless of
the organization’s own policies.
In a management letter to Project Challenge’s board,
the Office of the State Auditor recommended the board
revise the organization’s policies regarding personal and
third- party use of property, equipment and vehicles in
order to comply with grant requirements. In addition, the
Office of the State Auditor recommended the Governor’s
Crime Commission consult with legal counsel to deter-
35
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
mine if they should seek reimbursement of $ 764.46 ( 2,466
miles x $ 0.31 federal reimbursement rate as of October
1999) for the use of the vehicle during the trip to Florida.
Department of Transportation— Resident Engineer’s
Office A caller to the state auditor’s hotline alleged that
the Department of Transportation ( DOT) resident engi-neer’s
office in Matthews contracted with the spouse and
niece of the processing assistant assigned to the office,
thereby creating a conflict of interest.
Following a review of DOT records and interviews
with DOT employees and others, auditors concluded
that a conflict of interest did occur when an employee
obtained services from her spouse’s company. The pro-cessing
assistant at the resident engineer��s office was
responsible for contacting heating and air conditioning
companies in the area to obtain bids for their new office
building. The processing assistant stated she mailed
requests for bids to four local heating and air condition-ing
companies as well as to her husband’s company.
According to the assistant, she asked the Division 10 oper-ations
engineer if her husband could bid on the job and
got approval before sending him a request for bid.
The processing assistant’s husband was the only ven-dor
to attend the pre- bid conference and the only ven-dor
to submit a bid. Consequently, the employee’s
husband was awarded the job. The processing assistant
said both the resident engineer and the Division 10 engi-neer
were aware her husband’s company was awarded
the contract. Auditors determined that from 1994
through June 23, 2002, the processing assistant’s hus-band’s
heating and air conditioning company was paid
a total of $ 23,413 for services provided at the DOT build-ing
in Matthews.
In addition, auditors determined the processing assis-tant
was the contract administrator for her niece’s jani-torial
service contract. In May 2001, the current janitorial
contract was expiring and the Division 10 office in
Albemarle prepared a bid package to solicit bids for the
new project. The processing assistant believed it was
acceptable for her niece to submit a bid for the contract
since it had been approved for her husband to provide
services for the office. The employee’s niece submitted
the lowest of the three bids submitted for the contract
and subsequently was awarded the contract. From May
2001 through June 2002, the niece’s janitorial company
received $ 26,024 from DOT.
The processing assistant submitted a secondary
employment request to work for her niece’s janitorial
company to clean the DOT building. The Division 10
engineer denied her and removed the processing assis-tant
as the contract administrator once he learned of her
familial relationship to the contractor.
In a special review report, the Office of the State
Auditor recommended DOT implement procedures that
formally address the conflict of interest issues by iden-tifying
relationships among employees that may be
viewed by the public as conflicting with public service,
and communicating the organization’s process for
removing employees from any involvement with related
vendors.
Central Piedmont Community College During the Office
of the State Auditor’s annual financial audit of Central
Piedmont Community College ( CPCC), the auditors
noted that on August 1, 2000, CPCC paid a $ 93,600 real
estate broker’s commission on the purchase of 1.98 acres
from Central Piedmont Community College Founda-tion,
Inc. ( Foundation). Following the financial auditors’
collection of preliminary documentation surrounding
this transaction, the investigative audits division con-ducted
an investigation into this matter.
The investigation concluded that CPCC manage-ment,
in purchasing real estate from the foundation with
funds provided by the county, paid $ 260,548 more than
the price established by an option to purchase and paid
a $ 93,600 real estate commission when they already held
an option to purchase the property.
36
FRAUD, WASTE, AND ABUSE ( HOTLINE)
In 1994, CPCC acquired an option to purchase approx-imately
1.98 acres on Independence Boulevard in
Charlotte. Two years later, the foundation purchased the
property for $ 1,872,000 and leased it to CPCC for
$ 18,502.05 per month for a 10- year lease term. That same
year, CPCC and the foundation entered into an option-to-
purchase agreement for the property for the amount
of any outstanding loans secured by the property.
In August 2002, CPCC purchased the property from
the foundation for $ 1,872,000. The corresponding closing
and disbursement statement shows that CPCC paid a
$ 93,600 broker’s commission at the closing even though
CPCC already had an option to purchase from the foun-dation
prior to hiring a realtor. In addition, auditors noted
the purchase price was $ 260,548.25 more than the price
established by the option- to- purchase documents.
The CPCC executive vice president involved in the
transactions stated she prepared a list of properties
CPCC would like to acquire in the Elizabeth Street area
and gave the list to a realtor. The 1.98- acre plot was
included on the list in error because the vice president
had forgotten about the option to purchase. She
acknowledged that a realtor had not been needed for the
purchase and that CPCC had agreed to pay the
Foundation the purchase price of the land as opposed
to the amount of the outstanding loan ($ 1,611,451.75).
The attorney who represented the county in the real
estate transaction stated he had not been told of the
option- to- purchase agreement and that CPCC had orig-inally
been asked by the foundation to pay the market
value of the land ($ 2,200,000) but had refused. The pres-ident
of the real estate company that received the trans-action
commission, who is also a foundation board
member, said he had not been aware of the option to
purchase or the property would have been removed from
his company’s list of properties to acquire for CPCC.
The CPPC president stated he had forgotten the option
until auditors brought it to his attention. He also said that
the foundation intended on reimbursing the county
$ 260,548.25 as well as any interest that would have accrued
on the funds since the transaction. In addition, the
Foundation intended on reimbursing the county $ 80,753
for the commission and the realtor agreed to reimburse
the remaining $ 13,027 of the commission.
In a special review report, the Office of the State
Auditor recommended CPCC assure that the founda-tion
would reimburse the county $ 260,548.25 for the
excess purchase price and that the county be reimbursed
the $ 93,600 for the real estate commission. In addition,
the Office of the State Auditor recommended CPCC
review its procedures and practices on real estate pur-chases
to assure it is fully aware of the interest it holds
in properties and that real estate brokers are used only
when needed.
In a response to the special review report issued by
the Office of the State Auditor, the president of CPCC
explained that they had already implemented the rec-ommendation
and had reimbursed the County in full
for the additional cost to purchase and the real estate
commission.
Bladen County Partnership for Children, Inc. A call to the
state auditor’s hotline prompted a special review of an
individual allegedly selling playground equipment that
had already been purchased by the Bladen County Smart
Start Partnership. During the investigation that included
examination of Bladen County Partnership’s documents
and records, inspection of the Bladen Partnership’s play-ground
installations, interviews with employees of the
Bladen Partnership and with employees of the North
Carolina Partnership for Children, auditors concluded
that the executive director of the Bladen Partnership
authorized payments totaling $ 54,488.17 for playground
equipment that could not be located.
From June 21, 2000, to May 16, 2001, the Bladen
County Partnership was engaged in a project to improve
playgrounds at daycare centers in Bladen County. During
this time the Partnership purchased $ 318,568.03 worth of
37
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
playground equipment from various businesses, includ-ing
DayCare Specialties. During review, auditors noted
that a number of invoices from DayCare Specialties did
not provide information about the location of playground
equipment installations or specific equipment installed as
most invoices from other businesses did. Regardless, the
Partnership issued checks to DayCare Specialties, in some
instances payable directly to the owner of the company,
for these installations. Of the amount expended for play-ground
equipment, DayCare Specialties was paid
$ 178,222.52. Of this amount, auditors were unable to
locate $ 54,488.17 of playground equipment purchases
from DayCare Specialties.
The owner of DayCare Specialties acknowledged that
he received payments for work that was never com-pleted.
He said many of his invoices were based on plans
to install playground equipment at specific locations but
were never installed. The executive director of the
Bladen Partnership authorized cash disbursements to all
vendors, including DayCare Specialties, via her signa-ture
on checks. Although the executive director said that
a procedure existed to document the delivery and satis-factory
installation of playground equipment before a
check was issued, auditors found no evidence that this
procedure was followed.
The auditors also noted that several payments for
installation of playground equipment appeared exces-sive.
For example, DayCare Specialties was paid $ 7,847
to install a piece of Little Tykes playground equipment
that cost $ 3,858. For five installations of equipment cost-ing
$ 21,162.67, the Bladen Partnership paid DayCare
Specialties a total of $ 38,971. The ratio of installation
costs to acquisition costs for these items ranged from
129 percent to 284 percent. Invoices from another ven-dor
that provides the same type of services indicated
installation charges of 20 percent to 40 percent of the
cost of equipment.
The Bladen Partnership had no contract with
DayCare Specialties that could have included specific
rates for installation of various types of playground
equipment. In addition, auditors found no evidence that
the Partnership utilized a competitive bidding process
before employing DayCare Specialties.
During the review, auditors also noted that the Bladen
Partnership paid DayCare Specialties for the cost and
installation of playground equipment at an undesignated
childcare facility in Bladen County. One year later,
DayCare Specialties charged a childcare provider for the
same playground equipment. In February 2001, the
Bladen Partnership issued a $ 17,448 check to DayCare
Specialties for two pieces of playground equipment. On
the invoices for this equipment, no specific installation
location was assigned. During auditors’ inspection of
daycare facilities in Bladen County, they confirmed that
the two pieces of equipment had been installed at two
different childcare provider locations. One of the
providers paid DayCare Specialties $ 2,895 for one piece
of equipment, thus resulting in the vendor selling the
same piece of equipment twice.
In addition to the above findings, auditors also deter-mined
that the executive director authorized payments
totaling $ 10,500 to the owner of DayCare Specialties for
a transportation study that was never presented to the
board of directors or used to provide services the chil-dren
of Bladen County. The executive director said the
study was to determine the feasibility of providing trans-portation
for children to daycare centers. Auditors found
no evidence the Partnership obtained competitive bids
or executed a written contract for the project. The exec-utive
director was the only Partnership employee that
remembered the transportation study actually being
delivered. When asked by auditors to provide a copy of
the study, the owner of DayCare Specialties said his
copies were lost when his computer crashed and he had
not retained any paper copies. In addition, he stated the
executive director’s copies of the report were lost when
they had been in her car at the time of an automobile
accident.
38
FRAUD, WASTE, AND ABUSE ( HOTLINE)
The executive director did provide auditors with a
copy of the study near the end of the special review.
However, the report was never presented to the Bladen
Partnership’s board or used for any purpose related to
the Smart Start initiative.
During the investigation the auditors noted that pay-ments
totaling $ 188,722.52 to DayCare Specialties were
not reported to the Internal Revenue Service for 2000
and incorrectly reported for 2001 in violation of federal
regulations.
In a special review report the Office of the State
Auditor recommended that the North Carolina Part-nership
for Children seek reimbursement of $ 54,488.17
from the Bladen Partnership for the playground equip-ment
that could not be located. Additionally, the report
recommended the board consult with legal counsel
concerning DayCare Specialties incomplete perform-ance
of services and that the Bladen Partnership imple-ment
procedures to ensure that checks are not issued
without verification that a product has been received
or a service has been performed.
Additionally, the Office of the State Auditor recom-mended
the North Carolina Partnership for Children
analyze the installation costs and compare the installa-tion
costs to the costs charged other partnerships and
seek reimbursement for any excess from the Bladen
Partnership. The report also recommended the Bladen
Partnership’s board of directors ensure that future proj-ects
include written contracts outlining specific rates of
compensation for contracted services and include com-petitive
bidding procedures to ensure that compensation
does not exceed reasonable and customary rates. In the
special review report the Office of the State Auditor also
recommended the North Carolina Partnership for
Children seek an additional reimbursement of the
$ 10,500 for the transportation study from the Bladen
Partnership. The reports final recommendation was that
the Bladen Partnership’s board implement procedures
to ensure compliance with Internal Revenue Code
reporting requirements.
39
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
In their response, Bladen County Partnership for
Children, Inc. stated that legal services were being
retained as recommended to assist in pursuing resolu-tion
to the issues with DayCare Specialties regarding
incomplete performance of services, excessive payments
made to the vendor and the unauthorized sale of play-ground
equipment to a childcare provider. The Bladen
County Partnership board also said it would improve
oversight of the Bladen Partnership.
In the North Carolina Partnership for Children’s
response to the special review report, the executive direc-tor
indicated they would follow the Office of the State
Auditor’s recommendation to seek reimbursement from
the Bladen Partnership for any Smart Start funds
expended for playground equipment that could not be
located, as well as any Smart Start funds expended for
installation costs that exceeded reasonable and custom-ary
rates.
Pender County Partnership for Children, Inc. In July 2002,
the Pender County Partnership’s ( PCPC) board of direc-tors
requested the Office of the State Auditor conduct an
investigation into concerns that the executive director mis-handled
her office for personal profit. The board of direc-tor’s
original allegations included the disbursement of
partnership funds for unapproved program activities, vio-lation
of vendor contract policies and purchase of items
for personal use. Additional issues for investigation arose
during the course of the special review.
During the course of the investigation, which
included interviews with current and former PCPC
employees, interviews with PCPC board members,
interviews with individuals external to PCPC and exam-ination
of relevant documents, auditors noted a variety
of findings regarding the Pender Partnership’s financial
transactions and managerial actions. Auditors noted the
former executive director authorized expenditures of
$ 30,674.46 for activities not approved by the North
Carolina Partnership for Children, Inc. ( NCPC). NCPC
requires local partnerships to submit a proposal of all
planned service activities to be approved for funding.
The approved activities and programs are included in
the annual contract between a partnership and NCPC.
These contracts specify that any changes in the scope of
services provided by a local partnership must be pre-sented
to NCPC in writing and if agreed upon, will be
noted as an amendment to the original contract.
However, the former executive director of the Pender
Partnership authorized employees to charge costs to two
programs that had not been approved or included in the
contract between PCPC and NCPC. The former exec-utive
director did not include these programs and activ-ities
in the form of an amendment to the original
contract, thereby resulting in $ 30,674.46 of unallowable
funds, which had to be repaid to NCPC.
Auditors also discovered that the former executive
director obtained $ 30,714.64 in funds on behalf of PCPC
from Pender County without authorization of the
board, which was a violation in their bylaws. The for-mer
executive director obtained the funds to repay
NCPC for the unallowable expenditures. The former
executive director did not notify the board that she had
obtained such funds from the county subsequent to the
transaction.
During a review of check registers and invoices for pur-chases
made during fiscal years ending June 30, 2001, and
June 30, 2002, auditors identified $ 41,299.96 in question-able
expenditures made by the Partnership. Items pur-chased
included excessive amounts of food/ candy items
for staff and board meetings, flowers for staff and board
members and excessive amounts of promotional items.
Review of the documents also revealed that PCPC
paid $ 53,657.43 to vendors without adhering to com-petitive
bidding policies and procedures. PCPC also
obtained services from the former executive director’s
niece and husband, thereby creating a conflict of inter-est.
In addition, auditors determined that PCPC spent
$ 67,199.93 on local Headstart and kindergarten pro-
40
FRAUD, WASTE, AND ABUSE ( HOTLINE)
grams, neither of which were approved program
providers for the Partnership.
The investigation also noted that PCPC incurred in
$ 13,594.90 in questionable travel expense reimburse-ments
during the fiscal years ended June 30, 2001, and
June 30, 2002. The former executive director’s requests
for reimbursement for travel often lacked adequate detail
for locations and reasons for travel. In addition, the
mileage submitted by the former executive director dif-fered
significantly from the map mileage for those trips.
The auditors also noted that the former executive
director allowed a program provider to keep unex-pended
funds amounting to $ 15,891.27 that should have
been reverted to the Partnership and ultimately reverted
to the North Carolina Partnership for Children.
According to current Partnership staff, the former exec-utive
director told them to inform the program, which
was run by a Partnership board member, to keep the
money and to amend their annual budget so that the
unexpended funds were not shown. In addition the for-mer
executive director authorized two Partnership
employees to use $ 26,473.51 in salaried time to perform
assessments of unauthorized kindergarten programs.
According to the two employees instructed to perform
the assessments, the former executive director told them
they “ could find another job” if they did not provide the
assessments.
The Office of the State Auditor recommended that
PCPC revise their existing policies to provide necessary
internal controls to ensure that unapproved service codes
are not charged, pursuant to contract terms. The report
also recommended the board of directors develop an
action plan to familiarize themselves with PCPC’s poli-cies
and procedures to prevent board members from
authorizing expenditures or signing checks for unap-proved
activities.
With regards to wasteful or questionable expenditures,
the report recommended that PCPC management and
board revise their accounting policies and procedures to
ensure adequate control over payments to vendors,
including limiting purchases to items that are identifiable
as necessary for the performance of employee duties or
advancement of the Smart Start initiative. In addition,
auditors recommended the board reiterate and enforce
the requirements for quotes and/ or competitive bidding
for service contracts and purchases over threshold
amounts. To avoid even the appearance of a conflict of
impropriety, auditors recommended PCPC refrain from
hiring relatives of board and staff members.
Auditors recommended that all PCPC employees
adhere to travel reimbursement policies and that man-agement
review all travel reimbursement requests for
required documentation as well as evaluate the neces-sity
for mileage incurred.
The Office of the State Auditor advised NCPC seek
reimbursement of the $ 15,891.27 in unexpended funds
that should have been reverted to them and the
$ 26,473.51 in unallowable costs for the kindergarten
assessments by PCPC employees.
In a response to the special review report, PCPC’s
board agreed with the Office of the State Auditor’s find-ings
and recommendations and would seek reimburse-ment
of the $ 15,891.27 in unexpended funds and work
with NCPC to resolve the $ 26,473.51 in unallowable
salary costs.
Employment Security Commission An investigation was
begun when the Office of the State Auditor received a
complaint that the director of public information of the
North Carolina Employment Security Commission
( ESC) was consistently absent from the office or late
arriving to work without deducting leave from his offi-cial
timesheets. During the investigation auditors inter-viewed
several ESC employees who had maintained
their own diaries of the dates, times and excuses given
by the public information director when absent.
Auditors’ comparison of those diaries to the public infor-mation
director’s official timesheets for January 1, 2002,
41
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
through October 31, 2002, revealed he was absent and/ or
worked less than 8 hours 107 days of the 212 work days
reported as completed on the timesheets. Interviews
with employees indicated the director of public infor-mation
claimed to be working from home even though
he denied those employees the same privilege when
requested.
ESC had previously received a similar complaint that
had been internally investigated. The director of public
information’s supervisors had not felt the allegation was
adequately substantiated and had made no apparent
effort to follow up on the director’s absences.
During the investigation employees told auditors that
the public information director purchased equipment
that was not used, and in some cases never seen by staff.
Purchases such as a DVD- RAM drive, software and a dig-ital
video camera were not utilized by staff other than
the director and viewed as unnecessary by the auditors.
In addition, these purchases were made without the
director’s adherence to purchasing policies regarding req-uisitions.
Auditors also noted the director of public informa-tion
spent $ 40,123.05 on computer equipment and
repairs without the appropriate approvals. The ESC
Financial Management Handbook states that all com-puter
and software purchases are to be routed through
the Information Section for their review. The director of
public information failed to adhere to this policy for a
number of repairs, upgrades and purchases.
The investigation also revealed the director of public
information made $ 866.58 in unapproved purchases with
his personal credit card or cash and was reimbursed by
( Cameras): State Auditor Ralph Campbell takes questions from reporters during a news conference to release the performance audit on North
Carolina’s juvenile justice facilities.
42
FRAUD, WASTE, AND ABUSE ( HOTLINE)
ESC although the some of the purchases were shipped
to his home in the name of his personal business. These
purchases were made without adherence to the agency’s
required purchase order process, with the exception of
one item that fit into the allowable emergency purchase
requirement. Examples of non- emergency items pur-chased
include software, camera bags, CD- Rom
envelopes and a computer mouse. Auditors questioned
the validity of reimbursement for $ 610.15 in purchases
made directly by the director of public information.
In a special review report, auditors recommended the
public information director accurately record leave as
earned and used and that he maintain scheduled work-ing
hours and notify his supervisor when he is absent or
tardy. In addition, auditors recommended that if ESC
formally allows flexible work schedules and/ or telecom-muting,
policies be developed in order to assure the
needs of the agency and public are met and that all
employees are treated equitably.
Regarding purchasing issues, the state auditor rec-ommended
the public information director adhere to
purchasing policies regarding approvals and shipment
location and that all purchases for automation equip-ment
be reviewed by the Information Systems section.
The Employment Security Commission, in its
response to the special review report, stated the allega-tions
had previously been investigated to their satisfaction
and concluded the director was operating within agency
standards. However, the director of public information
did reimburse ESC for $ 119.99 for software purchased on
his personal credit card and ESC has taken steps to avoid
purchases being sent to an employee’s home.
In a special note from the state auditor addressing the
ESC response, the Office of the State Auditor stood by
its findings and recommendations made in the special
review report.
43
ANNUAL REPORT OF THE NORTH CAROLINA OFFICE OF THE STATE AUDITOR
Law Enforcement Support Services— Department of Crime
Control and Public Safety A complaint was received
through the state auditor’s hotline that employees in the
Law Enforcement Support Services ( LESS) within the
Department of Crime Control and Public Safety were
filling up their personal vehicles with gasoline from state
pumps. The investigation did not substantiate the initial
allegation. However, during the course of the investiga-tion,
auditors noted that LESS employees were com-muting
in undercover vehicles as well as identifiable
state- owned vehicles without proper authorization, pay-ment
of commuter fees or maintenance of adequate
mileage logs.
All five of the current and former LESS employees
interviewed stated they frequently drove state- owned
vehicles to and from their homes during the workweek
and to lunch on the days they commuted. All the
employees in question can be required to travel routinely
for job duties and in some cases the travel destination is
closer to the employee’s home than to the LESS office
in Raleigh. In those circumstances, it is understandable
for the employees to drive the state owned vehicle home
the night before travel is to occur. However, all employ-ees
interviewed stated they also commuted in the vehi-cles
on days when they were working in the office.
According to the director and employees of LESS,
this use of the state- owned vehicles was to keep the vehi-cles
“ road worthy” for loan to the various law enforce-ment
agencies. In addition, auditors discovered the direc-tor
of LESS commutes daily in a Ford Excursion that
was purchased under a contract with the Office for
Domestic Preparedness in the U. S. Department of
Homeland Security.
Motor Fleet Management ( MFM) regulations require
persons approved for commuting in state- owned vehi-cles
to pay a $ 3 daily fee for 20 days of each month.
In a management letter following the investigation,
the Office of the State Auditor recommended that LESS
employees cease commuting in state- owned vehicles
unless such use has been appropriately authorized by the
Department of Administration. In addition, the auditors
said employees should pay the required commuting fee.
In response to the management letter, the Depart-ment
of Crime Control and Public Safety agreed that to
avoid the appearance of impropriety, all LESS employ-ees
had been instructed to cease commuting in state-owned
vehicles. The department further instructed LESS
to maintain mileage logs and keep detailed records of
vehicle usage. The department also began discussions
with the Department of Administration to resolve any
issues with regards to the LESS Director commuting in
his permanently assigned vehicle and not reimbursing
the state for commuting expenses.
44
CONTACT INFORMATION C
Ralph Campbell, Jr., CFE,
State Auditor
Ralph_ Campbell@ ncauditor. net
(    )    -    
George H. Walls, Jr., Chief Deputy
George_ Walls@ ncauditor. net
(    )    -    
Jeff Henderson, CPA, CISA, Deputy
Jeff_ Henderson@ ncauditor. net
(    )    -    
Wesley Ray, CPA, Deputy
Wesley_ Ray@ ncauditor. net
(    )    -    
Vicky Young, Deputy
Vicky_ Young@ ncauditor. net
(    )    -    
Lenny Superville, Ph. D.
Director, Management
Information Systems
Lenny_ Superville@ ncauditor. net
(    )    -    
Cindy Gilliam, Controller
Cindy_ Gilliam@ ncauditor. net
(    )    -    
Martin Vernon, CPA, CISA,
Director, Information Systems
Audit Division
Martin_ Vernon@ ncauditor. net
(    )    -    
Rob Hillman, JD, CPA,
General Counsel
Rob_ Hillman@ ncauditor. net
(    )    -    
Glenda Shields, Personnel Officer
Glenda_ Shields@ ncauditor. net
(    )    -    
Dennis E. Patterson, Coorindator
of Audit Publications
Dennis_ Patterson@ ncauditor. net
(    )    -    
SENIOR MANAGEMENT TEAM
opies of reports issued by the Office of the State
Auditor may be requested through the email link on the
web site at www. ncauditor. net or by calling the main
phone number listed at right. Other inquiries, com-ments,
and suggestions may be made by contacting the
main office or one of the staff members listed below.
N. C. Office of the State Auditor
 South Salisbury Street
     Mail Service Center
Raleigh, NC      -    
Main Phone Number: (    ⁾    -    
Hotline Number: (    )    -    
Fax Number: (    )    -    
Janet Hayes, CPM
Specialty: Performance Audits
Janet_ Hayes@ ncauditor. net
(    )    -    
Lee Linker, CPA
Specialty: CAFR
Lee_ Linker@ ncauditor. net
(    )   ��� -    
David Nance, CPA
Specialty: Non- Governmental
Smart Starts
David_ Nance@ ncauditor. net
(    )    -    
Dale Place, CPA, CFE
Specialty: Fraud, Waste, and Abuse
Dale Place@ ncauditor. net
(    )    -    
Faye Steele, CPA
Specialty: Clerks of Court
Fayetteville Branch
Wilmington Branch
Greenville Branch
Elizabeth City Branch
Faye_ Steele@ ncauditor. net
(    )    -    
Stan Wesner, CPA
Specialty: Single Audit,
Health Issues
Stan_ Wesner@ ncauditor. net
(    )    -    
Linda Hollar, CPA
Specialty: Universities
Linda_ Hollar@ ncauditor. net
(    )    -    
AUDIT MANAGEMENT TEAM
North Carolina
Office of the State Auditor
 South Salisbury Street
     Mail Service Center
Raleigh, NC      -    
Main Phone Number: (    )    -    
Hotline Number: (    )    -    
Fax Number: (    )    -    